Russell 2000: Sloppy close after upside breakout

Kevin Pendley | May 03, 2008 9:17am EDT | Comment

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The upside breakout we mentioned a week ago came to fruition, with the Russell 2000 (NYSE:IWM) climbing to the highest point in four months during a week fraught with economic calendar event risk. The small cap index pushed through key long-term chart resistance at 724.72, which marked a 38.2% Fibonacci retracement target drawn off the entire bear market collapse.

Sustained action above 724.72 would help cement the bottoming process that has been underway from the January and March lows. If the market can hold above that point in coming weeks, then it clears the stage for a push toward the 50% Fibonacci target near 750 and the 61.8% line approaching 775. A push through the latter is needed to suggest that the bear market is dead and that a retest of the highs should be forthcoming, but as always we’d like to be well ahead of the official announcement.

The rally to four-month highs in small caps intensifies equity pressure on losing short positions. At this stage, it is unlikely that any short-biased index trades are holding profits, and those losing shorts may have to scramble out of those positions in coming weeks if stocks remain upright. In addition, fund managers who have been sitting on cash reserves may decide that the train is about to leave the station without them and start to reinvest in equities, which would chase the market into higher ground. Finally, there is plenty of talk about hedge funds being on the cusp of unwinding long energy/short dollar trades (the greenback is up about 4% vs. the euro in the last couple of weeks). All those factors could easily power another leg up in equities, but they remain primarily speculation at this stage.

Now that we’ve laid out the bullish side of the setup, let’s analyze some of the more sobering elements in play on charts heading into this week’s action. First, the market closed on a very sloppy note Friday, leaving some short-term topping patterns on daily and weekly studies that bear watching in the next few trading days.

At first blush, it might look as if the Russell buried 731 resistance Friday with ease, smashing through a double top in that zone from early February shortly after the opening as investors embraced the jobs report. However, the market did close well below the 731 zone, which makes it an unsuccessful test at this stage. Heading into this week’s action, 731 is the first upside point of interest, but there is a solid zone from 735 up to 743 that remains a test for the bulls. It would be surprising to see that zone fall without a tussle.

If the market does start to wobble this week, there is short-term support at 720.50, with the next spot down at 708. However, I’ll latch onto the “figure” at 700 as a big psychological benchmark. A decisive slide through 700 could open the door for a run down to 681. Strictly speaking, it would take a breach of 672 to suggest that the recent rally was only corrective in nature and not bottom forming.

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; tested May 2
> 725.74   May 2 close
- 724.72   38.2% Fibonacci retracement of the Aug. 2007 peak-Mar. 2008 collapse;
            violated late April 2008, but worth watching for short-term support
- 711.19   20-day moving average
- 703.02   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.

Economic calendar event risk takes a deserved holiday this week after a nerve-wracking bundle of releases this past week. The likely highlight takes place Monday morning with the ISM Non-Manufacturing Survey and is very tame thereafter. The Weekly Claims data Thursday morning might stoke up a little extra interest just because there isn’t much other data to trade on, and also because the market might be watching for any sign to back up the better-than-expected monthly employment report from Friday.

The table below highlights calendar event risk, 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

Risk
Factor Report/Item (all times Eastern)

4            ISM Non-Manufacturing Survey (Mon., 10:00 a.m.)
1            Fed’s Bernanke remarks at award dinner (Mon., 8:15 p.m.)
0            Fed’s Hoenig “rebalancing market risk…” (Tues., 9:30 p.m.)
1            Productivity (Wed., 8:30 p.m.)
0            Consumer Credit (Wed., 3:00 p.m.)
3            Weekly Claims (Thurs., 8:30 a.m.)
1            Wholesale Inventories (Thurs., 10:00 a.m.)
2            International Trade (Fri., 8:30 a.m.)