Russell 2000: Failing 750, now what?

Kevin Pendley | May 24, 2008 10:42am EDT | Comment

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The Russell 2000 (NYSE:IWM) took a stab at important chart resistance early this past week approaching the 750 level but retreated badly from that zone, forming a bearish outside reversal on weekly charts in the process.

Until now, it has been an orderly climb off the March lows. In fact, the 17-handle decline this week in the Russell 2000 was the second largest one-week decline since those March lows, and just the third lower weekly close in the last 11 weeks of trading. Heading into last week’s action, I cautioned that the zone from 743-750 corresponded with important chart resistance and it was unlikely 750 would fall without a tussle.

As you’ll see in the long-term Support & Resistance Table below, 750 represents a 50% Fibonacci retracement of the entire bear market collapse, and the zone from 743 up to 750 also matches previous chart support lines that become resistance on the rally.

Now that the market has failed the first test of 750, what should we expect next? First, the fact that the Russell formed an outside topping pattern on the failure this week raises the caution flag more than it would for just a lower close. If we see continued downside probing this coming week, then the key spots to watch are at 712.50 and then at the “figure” at 700. A breach of the latter on a weekly closing basis would seriously jeopardize the bottoming argument drawn off the lows from January and early March.

It’s interesting to note that even as the Russell was climbing to the highest point since early January last week, the price action was not embracing the move. For instance, when the Russell made new move highs on Monday, it closed lower on the session. A lower close in the face of significant intraday highs is considered a reversal pattern and merits respect – especially when the last portion of the rally higher was accomplished on very light volume. In fact, the dominant patterns on daily charts for the last eight sessions were all bearish formations, and the market closed below the 20-day moving average Friday, which could attract further selling this coming week if that line can not be pushed back through on the upside quickly.

If you are of the opinion that this past week’s topping action marked a major turning point for small caps, then the Fibonacci retracement lines drawn off the March recovery rally come in at 708 (38.2); 695.64 (50.0) and 683.28 (61.8). A breach of the 683 number would say that the rise off the March lows was corrective in nature and not indicative of a dynamic bottom. Clearly, that is still a long way off, but 708 could easily be tested this coming week, and is worth adding to the short-term list of points to watch.

The most likely course of action this week would be to see further downside probing, especially if overhead resistance at 731 and 735 is not tackled right away. If the market can push back through 735, then a retest of 750 is a logical target. However, a slide through 712.50 would open the door toward the figure at 700. Given the accumulation of bearish patterns this past week, the odds favor a downside outlook for next week.

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. Keep in mind that when the market is near record highs, it is much easier to find valid support than resistance points.

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
- 747.99   recent recovery peak set May 19; reversal pattern on daily and weekly charts
- 743.49   previous Aug. ‘07 collapse low; short-term support violated, now resistance;
            Also near chart gap left by Jan. 2008 employment report news
- 728.75   20-day moving average
> 724.10   May 23 close
- 712.50   chart-related support zone; short-term area to watch
- 702.54   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.

Even though we’re facing a shortened trading week this week, the economic calendar is fairly busy. The highlight will likely be Thursday’s GDP revision, or it could even come from Tuesday’s consumer confidence release. In addition to plenty of economic data to plow through this week, the speaking docket is active as well, including an appearance by Federal Reserve Chairman Ben Bernanke on Thursday afternoon.

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)

1                   Fed’s Kroszner “recovery in mortgage market” (Tues., 8:15 a.m.)
3                   Consumer Confidence (Tues., 10:00 a.m.)
1                   New Home Sales (Tues., 10:00 a.m.)
2                   Fed’s Yellen outlook and policy (Tues., 11:50 a.m.)
2                   Durable Goods (Wed., 8:30 a.m.)
1                   Fed’s Stern economic events (Wed., 12:50 p.m.)
1                   Fed’s Fisher “inflation and debt” (Wed., 9:00 p.m.)
4                   GDP (Thurs., 8:30 a.m.)
2                   Weekly Claims (Thurs., 8:30 a.m.)
4                   Fed’s Bernanke “liquidity provisions” (Thurs., 2:30 p.m.)
1                   Fed’s Kohn “money markets” (Thurs., 7:00 p.m.)
2                   Personal Income (Fri., 8:30 a.m.)
3                   Chicago Purchasing Survey (Fri., 9:45 a.m.)
3                   Michigan Sentiment Survey (Fri., 10:00 a.m.)
0                   Fed’s Rosengren speech TBA (Fri., 12:30 p.m.)