Russell 2000: Third weekly close below opening

Kevin Pendley | Jun 21, 2008 5:49pm EDT | Comment

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Small-cap stocks remained on the defensive this past week, generating a third consecutive weekly close below the opening, something that has not happened since the bottom was carved out back in March. When the market closes below opening levels, it shows that the bears are winning the skirmishes against the bulls and it establishes momentum for a bigger move if support points are broken apart.

Looking at daily chart studies, there is a head-and-shoulders top in play, which hints at further downside potential, especially if key support along the 720/717 zone is cracked this week. The market is testing range lows in that zone once again, setting up a little triple bottom support along that area. As I’ve noted in the past, double top or double bottom formations are powerful and must be respected, but triple top/bottoms are often attacked and defeated. It’s similar to the analogy of poking a balloon with a stick...if you keep doing it, the odds increase that the balloon will pop.

The Russell 2000 did manage to generate a decent recovery bounce off session lows Friday amid a wave of bearish news about fundamental elements such as rising crude oil prices, heightened geopolitical tensions between Israel and Iran and slumping financial sector stocks. For now, that recovery move off the lows Friday should be respected, but if small-caps sink back below 720.50 early this week then it greatly enhances the odds for a decisive breakdown to a new lower trading range.

A convincing push below 720.50/717.50 would carry a downside target move to 690, which just happens to fit perfectly with a 61.8% Fibonacci retracement of the March-June rally (the exact Fibonacci point is 688.98). If that 61.8% retracement were violated, it would suggest that the rally off the March lows was corrective in nature, and not necessarily bottom forming. In essence, a breach of 690 opens the door to retest those March/January lows, which makes it a very important week for the bulls to stage a rally.

Speaking of a rally, it still would take a more convincing push back above 750 to suggest that another leg up is in store for small-cap stocks. What’s more, that double top on daily charts at the recent highs near 763 simply adds another layer of resistance on any upside rally.

The overall chart structure is still top-heavy here, and the most likely course of action this week would be a downside breach of the recent lows, and a move toward the aforementioned 690 support. With the FOMC rate announcement on tap this week, the market could be poised for a more dramatic push outside of the recent ranges, with the odds favoring a downside resolution of this chart setup.

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
- 762.89   recent move high set June 5, 2008
- 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;
            Violated in early June, but not on a weekly closing basis
- 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
- 736.45   20-day moving average
> 725.73   June 20 close
- 720.50   recent trading range; chart support lows
- 717.20   38.2% retracement of the March-June rally
- 712.50   chart-related support zone; short-term area to watch
- 710.02   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 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 relatively light this week, although the action leading into and after Wednesday’s big FOMC announcement could stir up plenty of volatility. Outside of FOMC, the likely highlight will be Monday’s Consumer Confidence report, which is the only June data slated for release among the various indicators. Federal Reserve Vice-Chairman Donald Kohn is scheduled to speak in Frankfurt on Thursday morning, but his appearance is supposedly closed to the press and there will be no text of his speech released by the Fed.

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 FOR THIS WEEK

RISK FACTOR REPORT/ITEM (all times Eastern)

1            Case/Shiller Home Price Index (Tues., 9 a.m.)
2            Consumer Confidence (Tues., 10 a.m.)
3            Durable Goods (Wed., 8:30 a.m.)
2            New Home Sales (Wed., 10:00 a.m.)
5            FOMC Announcement (Wed., 2:15 p.m.)
2            GDP (Thurs., 8:30 a.m.)
2            Weekly Claims (Thurs., 8:30 a.m.)
2            Existing Home Sales (Thurs., 10:00 a.m.)
1            Personal Income (Fri., 8:30 a.m.)
2            Michigan Sentiment (Fri., 10:00 a.m.)