Russell 2000: Sloppy close after upside breakout

The upside breakout we mentioned a week ago came to fruition, with the Russell 2000 (NYSE:IWM) climbing to the highest point in four months during a week fraught with economic calendar event risk. The small cap index pushed through key long-term chart resistance at 724.72, which marked a 38.2% Fibonacci retracement target drawn off the entire bear market collapse.

Sustained action above 724.72 would help cement the bottoming process that has been underway from the January and March lows. If the market can hold above that point in coming weeks, then it clears the stage for a push toward the 50% Fibonacci target near 750 and the 61.8% line approaching 775. A push through the latter is needed to suggest that the bear market is dead and that a retest of the highs should be forthcoming, but as always we’d like to be well ahead of the official announcement.

The rally to four-month highs in small caps intensifies equity pressure on losing short positions. At this stage, it is unlikely that any short-biased index trades are holding profits, and those losing shorts may have to scramble out of those positions in coming weeks if stocks remain upright. In addition, fund managers who have been sitting on cash reserves may decide that the train is about to leave the station without them and start to reinvest in equities, which would chase the market into higher ground. Finally, there is plenty of talk about hedge funds being on the cusp of unwinding long energy/short dollar trades (the greenback is up about 4% vs. the euro in the last couple of weeks). All those factors could easily power another leg up in equities, but they remain primarily speculation at this stage.

Now that we’ve laid out the bullish side of the setup, let’s analyze some of the more sobering elements in play on charts heading into this week’s action. First, the market closed on a very sloppy note Friday...

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