Russell 2000: Breakout at hand?

Kevin Pendley | Apr 26, 2008 1:05am EDT | Comment

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When it was all said and done this past week small caps were basically unchanged, which shortchanges the volatile roller coaster ride investors had to survive to arrive at Friday’s close. In the end, the Russell 2000 (NYSE:IWM) managed to notch the highest weekly close since late January, which keeps the heat on any losing sell positions heading into an important week.

From an absolute return basis, recent action might seem like very little bang for the buck. However, on a long-term chart structure, the market is building a nice foundation for the bottom that was carved out in the first quarter of 2008. Given the extreme nature of the losses from last year’s record highs, a bottom formed over time is a more reliable structure than one suggested by volatile price spikes.

As we move into the coming week’s action, the market is sitting just shy of trendline resistance drawn off the October peak. A decisive push through that trendline would be yet another signal that there are legs beneath this bottoming action. However, it should be noted that the trendline is coupled to key long-term chart resistance near 724, which marks a 38.2% Fibonacci retracement drawn off the entire bear market collapse. The last time the market tested that zone it retreated, but this time around we’ve now had several weeks to consolidate and build a power base for a more commanding upside push. In fact, ever since the lows were hammered out in March, we have had five weeks of consolidation between the 681 and 724 zone. From a breakout perspective, a breach in either direction of that range carries a target move of 43 handles (767 on the upside, 638 on the downside).

It’s interesting that we arrive at this nexus in tandem with a critical week of major potential market-moving activity, or "economic event risk." As you’ll see in the calendar below, not only will we have to endure the big monthly employment report, but the FOMC meeting Tuesday afternoon could spark the kind of major move from which breakouts are born. Given several “head fake” initial reactions to the jobs report in recent months, it would be reasonable to say that FOMC and chart price action in the coming week could be a major part of establishing either a new breakout range for small-cap stocks, or a failure back into the lower portion of the bear-market zone.

This is a risky week to predict market behavior, but I hold a slight preference for a trading range between 712 to 755, which would mark an upside breakout to the recent consolidation. However, if the Russell falters once again at 724, and we slip down through 700, it could mean that the market needs to retest those bear market lows in the weeks 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
> 721.88   Apr. 25 close
- 707.31   20-day moving average
- 705.37   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
- 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 printout 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 couple of quiet weeks on the event risk front, the storm clouds move back onto the horizon this week. The market will get literally deluged with key economic data, highlighted by Friday’s employment report. It’s not often that the jobs release is overshadowed, but that is probably the case this week because of Tuesday’s FOMC announcement.

The table below highlights the week’s calendar event risk, 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)

3    Consumer Confidence (Tues., 10:00 a.m.)
4    GDP (Wed., 8:30 a.m.)
2    Employment Cost Index (Wed., 8:30 a.m.)
3    Chicago Purchasing Manager’s Survey (Wed., 9:45 a.m.)
5    FOMC Policy Statement (Wed., 2:15 p.m.)
2    Personal Income (Thurs., 8:30 a.m.)
3    Weekly Claims (Thurs., 8:30 a.m.)
4    ISM Manufacturing Survey (Thurs., 10:00 a.m.)
1    Construction Spending (Thurs., 10:00 a.m.)
3    Vehicle Sales (Thurs., all day)
5    Employment Report (Fri., 8:30 a.m.)
1    Factory Orders (Fri., 10:00 a.m.)