Russell 2000: Critical test at 724 zone

Kevin Pendley | Apr 05, 2008 11:39am EDT | Comment

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The Russell 2000 (NYSE:IWM) had a mixed session on the charts Friday as traders had difficulty reading the nuances of the big employment report. The fact that the market held together after a key data release was promising, but after several months of head-fake short-term rallies on the jobs report, one has to take the initial market reaction with a grain of salt.

The chart structure is a little toppy on daily studies after Friday’s rejection of intraday highs left a so-called doji on daily candlestick charts, but that is counterbalanced by a healthy rally off a potential warning formation on weekly and monthly charts.

The market did push through important resistance last week at our old swingline at 700, and above mild chart struggles at 705. Weekly studies show that the Russell 2000 index is on the verge of closing above the 20-week trend moving average, something that hasn’t happened since October 2007. That 20-week moving average was a key trend marker on the big bull market run from 2002-2007, and a rally through that point could start to attract trend-following money into the buy side of small cap stocks.

The critical test for the Russell remains overhead along the 724 zone; a decisive breach of that area would greatly support the bottoming argument, as would a drive through 729, which marks a 38.2% Fibonacci retracement of the bear market collapse. The consolidation process on weekly and monthly charts has helped to form a decent foundation for a rally, and the market is slowly grinding up toward a test of levels that would significantly enhance that view.

Despite the promising signals, there is still no dynamic chart reversal or triumphant breakdown of long-term resistance to shout out that a bottom is in place. In fact, if the market does not press higher quickly this week, then the stalling doji formation from daily charts Friday will start to dominate the picture. Any slide this week back below the 700 swing line would be cause for concern, and a dip back below 685 would truly call into question the immediate direction of prices.

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
- 714.01   20-week moving average; nice trend support for bull run; smashed on
            July/August 2007 collapse
> 713.73   Apr. 4 close
- 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
- 684.41   20-day moving average
- 680.94   mild reversal low on daily charts Jan. 28
- 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.

The economic calendar is thin on substance this week, and the only highlight appears to be the FOMC minutes on Tuesday afternoon, which could stir some volatility into the mix.

The table below highlights calendar event risk for this 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)
0    Consumer Credit (Mon.day, 3:00 p.m.)
0    Fed’s Yellen & Kohn @ dedication ceremony (Mon., 5:30 p.m.)
5    FOMC Minutes (Tue., 2:00 p.m.)
1    Fed Chair Bernanke intro @ Jumpstart Coalition (Wed., 9:30 a.m.)
1    Wholesale Inventories (Wed., 10:00 a.m.)
2    Fed’s Fisher on current econ condition (Wed., 1:40 p.m.)
2    International Trade (Thu., 8:30 a.m.)
1    Weekly Claims (Thu., 8:30 a.m.)
1    Fed Chair Bernanke @ World Affairs Council (Thu., 1:00 p.m.)
0    Treasury Budget (Thu., 2:00 p.m.)
0    Import Prices (Fri., 8:30 a.m.)
1    Michigan Sentiment (Fri., 10:00 a.m.)