Russell 2000: At a crossroads

Kevin Pendley | Oct 17, 2008 5:04pm EDT | Comment

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Small-cap stocks are at a clear crossroads--either establish a bottom for the bear market collapse or sink into a new leg down. For the first time in several weeks, there are some positive signals worth noting on daily charts but weekly studies still lack the punch to suggest the lows are in place.

As for this week’s action, the Russell 2000 (NYSE:IWM) finally closed above opening levels on weekly charts. Hey, maybe it was only by 0.76%, but the weekly candlestick was still green! This marked the first close above opening levels on a weekly basis since this whole crash kicked into gear in mid-September. In fact, the last time the Russell closed above opening levels on weekly charts it represented the HIGHEST weekly close of 2008. Now, we’re down 31% for the year and down 38% from the bull market peak back in the summer of 2007. At last week’s lows, the market was down 45% from those record highs, roughly in line with previous recession-era collapses in the stock market dating back nearly 40 years.

While the weekly green candle is a nice minor (very minor) victory, the really positive signs are tied to how the market traded off the recent lows. First, small-caps rejected the move lows to close higher. Then, on a retest this week toward those lows, the market stalled downside momentum above the collapse trough and shot higher once again, leaving little “twin wick” bottoms on daily candlestick charts. If the Russell can mount a push to fresh move highs without taking that recent low, then it would further support the bottoming argument. In essence, we’re talking about a push back above 584, without a breach of 484. I’m even willing to trim that down even closer: I do not want to see the Russell slip back through the “figure” line at 500, especially on a closing basis. Decisive action below 500 would suggest at a minimum a retest of 468, and quite possibly further lows beyond that point.

As for the weekly chart studies, we see a simple inside session pattern off this week’s price action. Inside sessions typically suggest waning momentum and a potential shift in trend, which is supportive for small caps, but these patterns lack the stand-alone power of a major reversal formation. Now that we have options expirations out of the way, it will be interesting to see if the market can move back into a bullish mode next week. The stakes are clearly high.

The table below contains support and resistance points for the Russell 2000 to keep in mind heading into the week’s trading. For long-term traders, some of these key levels may remain in place for weeks...even months at a time. Those with a short-term horizon will lean toward levels that are more immediately in play. As time passes, we will build upon this table with levels that come into focus as important testing zones for trend analysis, and to act as road mark indicators for key reversal patterns.

From a trading perspective, I always keep a printout handy each day of my key support and resistance points for any stock or market I’m trading. It helps remind me of key areas to watch for signs of trend exhaustion, and also for potential entry/exit points for trades. Keep in mind that when the market is near record highs, it is much easier to find valid support than resistance points.

TECHNICAL ANALYSIS SUPPORT/RESISTANCE POINTS FOR RUSSELL 2000

- 890.16   upward channel resistance on monthly charts off 5-year run;
            also fits with potential upside breakout of congestion zone
- 860.00   projected “figure” resistance off 15-handle testing zones on the ’06 rally
- 856.48   record intraday high set July 13, 2007
- 855.77   July 13, 2007 close; record high daily and weekly close
- 852.06   Oct. 11, 2007 high; bearish reversal peak on daily charts
- 830.01   previous high from the February 2007 peak; key swing line of note
- 815.00   key swing line
- 801.00   congestion resistance zone from November-December 2006
- 775.03   61.8% Fibonacci retracement of the Aug. 2007 peak-Mar. 2008 collapse
- 764.38   new move high set August 15, 2008; approximate double top with June ‘08
- 762.89   previous move high set June 5, 2008
- 760.06   March correction low; key approximate double bottom formation support;
            Near 50% Fibonacci of July ’06-’07 bull run; violated in November ’07;
            Key swingline to watch
- 743.49   previous Aug. ‘07 collapse low; short-term support violated, now resistance;
            Also near chart gap left by Jan. 2008 employment report news
- 726.19   previous double top in June/July 2008
- 720.50   recent trading range swing point
- 700.00   “figure” swing line; no monthly close below here since Dec ’05 until Feb ‘08
- 685.00   20% decline off 2007 record highs; breached Jan. 2008, July 2008, Sept. ‘08
- 684.25   20-week moving average; nice trend support for bull run; smashed on
            July/August 2007 collapse
- 680.94   mild reversal low on daily charts Jan. 28; near 50% of the March ’08 bounce
- 668.58   July 2006 low; important bottom for summer correction; now resistance
- 660.00   short-term downside target on wedge breakout; now swing line
- 650.00   previous bear market move low set Jan. 22, 2008, former critical support zone
- 647.37   July 15 2008 low; approximate triple bottom with Jan ’08; Mar ’08; snapped
            October 2008
- 643.28   previous move low set Mar. 10, 2008; now resistance
- 614.76   October 2005 bottom; next major chart related downside point
- 610.88   20-day moving average
- 606.42   April 2004 highs, now long-term support
- 591.00   50% Fibonacci retracement of the 2002-2007 bull market run
- 577.00   consolidation zone when marketing was bottoming in spring 2005
- 570.06   absolute low on spring 2005 bottom
> 526.43   Oct. 17 close
- 522.48   October 10 close; lowest weekly close since August 2004
- 500.00   logical big “figure” swingline
- 467.90   move low forged Oct. 10, 2008
- 458.00   approximate 75% retracement of entire bull market run
- 430.00   figure point near 50% “recession target” pullback

In addition to the print-out of support and resistance points to watch, I also like to keep in mind where sudden volatility can spring into the trading mix from the typical release of economic data and Federal Reserve activity.

The economic calendar this week is pretty much a non-event until we get to weekly claims on Thursday and existing home sales Friday, and even those reports probably won’t create any kind of tidal wave outside of a stunning surprise on claims. Except for the Bernanke appearance Monday, this leaves the week open to other outside considerations, earnings releases and just pure price action.

The table below highlights calendar event risk for the coming week, with the emphasis on various economic reports. Our table below has a special “Risk Factor” designation, which is simply my assignment of risk to that event, ranging from 0 to 5, with 5 marking the highest risk for volatile market swings.

CALENDAR EVENT RISK ASSESSMENT

RISK FACTOR REPORT/ITEM (all times Eastern) Consensus

1           Leading Indicators (Mon., 10:00 a.m.)                        -0.2%
5           Fed’s Bernanke testifies on economy (Mon., 10:00 a.m.)
1           Fed’s Lockhart on the economy (Mon., 12:45 p.m.)
0           Fed’s Kroszner on risk management (Mon., 12:45 p.m.)
0           Fed’s Stern speech TBA (Tues., 7:30 p.m.)
3           Weekly Claims (Thurs., 8:30 a.m.)                           465,000
2           Existing Home Sales (Fri., 10:00 a.m.)                      4.98 mln