Russell 2000: Fourth straight close below opening levels

Kevin Pendley | Jun 28, 2008 3:05pm EDT | Comment

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The bearish head-and-shoulders pattern that we’ve been warning about crashed through support this past week, paying huge dividends to the bears as the Russell 2000 (NYSE:IWM) generated the largest one-week decline since February. Small-caps have now closed below opening levels on a weekly basis four consecutive weeks, which is a relatively rare phenomenon, and which hasn’t happened since the December-January collapse. How unusual would it be to see another close in red candles this week? Well, it hasn’t happened five straight times in more than three years.

The chart structure retains a “heavy” bias here, but the market is now near logical support along the 690 zone, which was our downside target on a breach of 720.50. As we noted in last week’s column, that area around 690 (688.98, to be exact) marks the 61.8% Fibonacci retracement of the March-June rally. A decisive push below that point would suggest that the rally off the March lows was corrective, and not bottom forming. This is a critical point to remember: a breach of 690 reopens the entire debate about whether the bear market bottomed in March, or simply staged a corrective bounce.

If the Russell does slide through 690 this week, then the next support points to watch come into play at 681 and then at 668. The latter would mean that the January/March double bottom is coming into a retest, which is a scary proposition for any bulls left hanging on. If small-caps can avoid that rare fifth consecutive red candle this week, then resistance is back on our old support zone from 717.50 to 720.50, then approaching 736.

Although momentum indicators are nearing oversold territory and at the lowest levels since the March bottom, it should be noted that the 14-day RSI has not yet slipped to the level that triggered a bounce in both January and in March. What’s more, momentum readings are tools for gauging overdone conditions, but the numbers can be stretched beyond norm in extraordinary situations.

The most likely course of action this week would be for small-caps to stabilize around the 690-685 zone, then stage a bounce into the monthly employment report, which comes out early this time on a Thursday because of Friday’s Independence Day holiday. If we see a support failure below 690 this week, then things could get truly ugly and an absolute washout toward 675 is possible. In order for the bottoming argument off the March lows to hold water, this is a very important point in the process.

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
- 728.94   20-day moving average
- 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
- 708.48   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
> 698.14   June 27 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 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.

We might be looking at a short week for trading, but there is no shortage in economic data, with several reports on manufacturing ahead of the big monthly employment release Thursday afternoon.

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)

2             Chicago Purchasing Manager’s Survey (Mon., 9:45 a.m.)
3             ISM Manufacturing Survey (Tues., 10 a.m.)
1             Construction Spending (Tues., 10:00 a.m.)
2             Vehicle Sales (Tues., all day)
0             Fed’s Lockhart on economic slowdown panel (Tues., 6:00 p.m.)
3             ADP employment report (Wed., 8:15 a.m.)
1             Factory Orders (Wed., 10:00 a.m.)
1             Fed’s Mishkin “global financial disruption” (Wed., noon)
5             Employment Report (Thurs., 8:30 a.m.)
1             Weekly Claims (Thurs., 8:30 a.m.)
3             ISM Non-Manufacturing Survey (Thurs., 10:00 a.m.)