Russell 2000: Begging for upside confirmation

The Russell 2000 (NYSE: IWM) bounced 4.4% last week, forming a nice bullish engulfing pattern reversal on weekly candlestick charts in the process. The market was deeply oversold following the dramatic collapse off record highs, and although the reversal pattern was a solid step in the right direction, the market will need to generate upside confirmation to suggest that this was a meaningful bottom. If small-cap stocks are reasonably close to a low for the move, we might also see several weeks of consolidation in the 750-810 zone to build a foundation.

In short, the pattern formed by last week’s recovery was not yet decisive enough to warrant wholesale buying on dips, or to call for an end to the correction. Given heavy economic news this week, price movement could be critical to either resume the decline, or provide more convincing bottoming action.

Resistance on the bounce comes in on a short-term basis at 800 and 813, which mark 50% and 61.8% Fibonacci retracement points from the July-August swoon. A decisive push above the latter would also likely lift the index through the 20-day moving average, which could spark some short-covering and further lift recovery efforts.

All that said, the market is currently in a downswing, and the sudden power of a bearish jolt must be respected. One could argue that the volatile bounce off last week’s lows was more a reflection of oversold conditions amid short profit-taking from hot money accounts that caught the double top pattern decline. In fact, the bounce off the lows left something of a bear flag formation on daily charts.

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