Russell 2000: Friday plunge disconcerting

Kevin Pendley | Apr 11, 2008 8:16pm EDT | Comment

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Small-cap stocks have been consolidating in a mild upward draft off the multi-year lows forged in March. The corrective push has been orderly in nature and consistent with bottoming action, but Friday’s hard slide in the Russell 2000 (NYSE:IWM) back below the 700 swingline is cause for mild concern. The trading action through the coming week’s slate of key economic reports could set the stage for either another leg up on the rally, or it could solidify the risk of retesting the March lows.

It typically takes time to build a foundation for a major low, especially one that saw small caps wipe out over 25% of their value in a relatively quick span. For now, the chart setup remains consistent with a market that is struggling to re-establish value. Even if we slip through key support points next and embark on a retest of the 650-640 zone, it might not be a terrible sign for the market over the long haul.

From a pattern standpoint, the Russell 2000 formed a double top this past week near the highs. A similar formation back in early February foreshadowed the move to fresh lows in mid-March, and this past week’s failure should be respected as long as the market holds below 700.

Going into the coming week’s trading, the key short-term points to watch are at 681, which marks a 50% Fibonacci retracement of the March rally. In addition, there is chart-related support in that region from the late-March trough. A slide through that point would seriously enhance the risk of a downside push. At 672 comes in the 61.8% retracement, and a breach of that point would tell us that the recent rally off the March lows was simply corrective in nature and not bottom forming.

It’s worth noting that the Russell 2000 Index slipped back below the 20-day moving average on Friday (which was at 694.09). Also, the market failed the last couple of weeks testing the 20-week moving average, which was a solid trend indicator on the 5-year bull market run from 2002-2007. The last time the market failed the 20-day moving average from the upside was back on Feb. 28; the index tumbled from 705 to a low near 643 in just seven sessions after that failure. Although most “black box” trading systems use several indicators for investing funds, basic moving average lines can be of assistance in gauging whether or not fund money is on the cusp of making a long or short push, and in this case the market is faltering just before it might entice that kind of money back into stocks.

Looking ahead to the coming week, the most likely course of action would be a range between 696 and 660. A decisive rise back above 700 clears the way for a retest of 720 – and it’s unlikely that sellers would be as eager to take a stand on a third push. Keep in mind that the 724 zone represents a key 38.2% retracement of the entire bear market collapse, and is the first major road sign on the way to recovery if those March lows can hold up in the days ahead.

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
- 775.03   61.8% Fibonacci retracement of the Aug. 2007 peak-Mar. 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
- 749.88   50% Fibonacci retracement of the Aug. 2007 record peak-Mar. 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
- 724.72   38.2% Fibonacci retracement of the Aug. 2007 peak-Mar. 2008 collapse
- 712.17   support zone on weekly charts; reversal low in Oct. 2006; now resistance
- 709.72   20-week moving average; nice trend support for bull run; smashed on
            July/August 2007 collapse
- 700.00   “figure” swing line; no monthly close below here since Dec ’05 until Feb ‘08
- 694.09   20-day moving average
> 688.16   Apr. 11 close
- 685.00   20% decline off 2007 record highs; breached Jan. 2008
- 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
- 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.

After a lull last week, the economic calendar steps up in prominence again this week, with important releases on tap on retail sales, inflation, manufacturing and housing starts. The highlight likely hits right away Monday morning with the Retail Sales information, which could set the tone for the week to come on the data front.

The table below highlights calendar event risk for next 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)
5           Retail Sales (Mon., 8:30 a.m.)
2           Business Inventories (Mon., 10:00 a.m.)
0           Fed’s Warsh on “Financial Market Developments” (Mon., 3:15 p.m.)
4           PPI (Tue., 8:30 a.m.)
3           NY Manufacturing Survey (Tue., 8:30 a.m.)
4          CPI (Wed., 8:30 a.m.)
2          Housing Starts (Wed., 8:30 a.m.)
3          Industrial Production (Wed., 9:15 a.m.)
1          Fed’s Yellen on the econ outlook (Wed., 11:45 a.m.)
0          Fed’s Plosser on “Education...Prosperity” (Wed., 12:30 p.m.)
2          Beige Book (Wed., 2:00 p.m.)
2          Weekly Claims (Thu., 8:30 a.m.)
0         Fed’s Kohn on “...lessons from recent turmoil” (Thu., 9:45 a.m.)
1          Leading Indicators (Thu., 10:00 a.m.)
3          Philly Fed Survey (Thu., 10:00 a.m.)
0          Fed’s Fisher on “Evolution of Int’l Trade” (Thu., 1:45 p.m.)
0          Fed’s Lacker & Rosengren on systemic risk panel (Fri., 8:30 a.m.)