Russell 2000: Correction, or bottom in the making?

Kevin Pendley | Mar 29, 2008 10:20am EDT | Comment

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The Russell 2000 (NYSE:IWM) limped into the close Friday, failing to take the bit and run with some of the potentially bullish chart patterns that have emerged in recent weeks off the bear market lows. Considering the chart structure and a week full of big economic news ahead of us, how the market trades this week could be critical in gauging the validity of any bottoming argument.

From a long-term perspective, there is still a decent double bottom/twin wick pattern in play on monthly Russell 2000 candlestick charts. However, we’ll need to see a rally Monday back above 686.05 to avert yet another monthly close below opening levels. If we don’t get to that price, it would mark the fifth consecutive “red” or bearish candle on monthly charts (which signifies a close below opening levels). It is extraordinarily rare for any market to generate that much consecutive bearish price action on a monthly basis, and it hasn’t happened in the Russell since 2002. What’s more, further downside erosion would also damage the quality of the bottoming patterns on monthly charts.

Looking at weekly charts, we see a little “tombstone doji” on candles; in Japanese candlestick theory, these patterns are so-called tombstones because they mark the graves of bulls who died defending their territory. Taking this pattern out of play this week becomes an important element to watch if you’re looking for the market to resume upside action.

From a western charting perspective, it’s clear that the market this week struggled to attract buyers above the 705 zone, and then faltered back below our old swingline at 700, and even dipped Friday afternoon through important short-term support along the 685 zone. If the Russell 2000 sinks back below 660, it would suggest that the recent rally was simply corrective in nature, and not bottom-forming. The stakes are high.

Given the high risk element in the coming week, a breakout in either direction could be the most important thing to watch out for. A push above 705 without a slide through 660 opens the door for a run to critical longer-term resistance near 724. Conversely, a push back below 660 could easily trigger a retest of the lows along 643, which would smash the bottoming patterns evident right now, and could open the door for yet another leg down in the bear market run.

The table below contains support and resistance points for the Russell 2000 to keep in mind heading into this 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.

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
- 855.77   July 13 close; record high daily and weekly close
- 852.06   Oct. 11 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
- 777.00   61.8% Fibonacci retracement of the Aug. 2007 peak-Jan. 2008 collapse
- 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
- 753.50   50% Fibonacci retracement of the Aug. 2007 record peak-Jan. 2008 collapse
- 743.49   previous Aug. ‘07 collapse low; short-term support violated, now resistance;
            Also near chart gap left by Jan. 2008 employment report news
- 734.40   previous key slide low; now resistance on a bounce
- 731.24   recent double top in Feb ‘08
- 729.00   38.2% Fibonacci retracement of the Aug. 2007 peak-Jan. 2008 collapse
- 715.01   20-week moving average; nice trend support for bull run; smashed on
            July/August 2007 collapse
- 712.17   support zone on weekly charts; reversal low in Oct. 2006; now resistance
- 700.00   “figure” swing line; no monthly close below here since Dec ‘05
- 685.00   20% decline off 2007 record highs; breached Jan. 2008
> 683.18   Mar. 28 close
- 680.94   mild reversal low on daily charts Jan. 28
- 677.40   20-day moving average
- 668.58   July 2006 low; important bottom for summer correction
- 660.00   short-term downside target on wedge breakout; support zone
- 650.00   previous bear market move low set Jan. 22, 2008, critical support zone
- 643.35   recent move low set Mar. 10, 2008
- 614.76   October 2005 bottom; next major chart related downside point
- 591.00   50% Fibonacci retracement of the 2002-2007 bull market run

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.

Not only is the economic calendar this week jam-packed with key releases, but we also have Federal Reserve Chairman Ben Bernanke testifying on the economic outlook Wednesday morning before the Joint Economic Committee. It could be a wild week for market volatility, capped off by Friday morning’s big jobs report.

The table below highlights calendar “event risk” for the week, with the emphasis on various economic reports. Our table 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

DAY REPORT/ITEM (all times Eastern) RISK FACTOR

Mon      Fed’s Yellen “foreclosures/community develop.” (9:30 a.m.)      0
Mon      Chicago Purchasing Managers Survey (9:45 a.m.)                    2
Tue       ISM Manufacturing Survey (10:00 a.m.)                                4
Tue       Construction Spending (10:00 a.m.)                                     0
Tue       Vehicle Sales (all day)                                                       2
Wed      Fed Chair Bernanke on the economic outlook (9:30 a.m.)          5
Wed      Factory Orders (10:00 a.m.)                                               1
Thu       Weekly Claims (8:30 a.m.)                                                  2
Thu       ISM Non-Manufacturing Survey (10:00 a.m.)                       3
Thu       Fed’s Yellen on the US econ outlook (8:00 p.m.)                    1
Thu       Fed’s Mishkin “central bank commitment” (8:15 p.m.)            0
Fri         Employment Report (8:30 a.m.)                                          5
Fri         Fed’s Kroszner “global econ challenges” (2:45 p.m.)               0