In last week’s column, I said that the market was approaching a critical support test for the overall bottoming argument, and that a decisive breach of the 61.8% Fibonacci retracement near 690 could spark a wicked sudden downdraft in small-cap stocks and that things “could get truly ugly and an absolute washout toward 675 is possible.” Well, the market obviously failed that test miserably in the holiday-shortened week, and added 10 handles on to that washout to boot. The collapse now endangers the bottoming argument drawn off the March lows.

The velocity of declines endured the last two weeks in the Russell 2000 (NYSE:IWM) represents some of the most ferocious consecutive wipeouts you’ll find on any long-term chart. What’s more, the bearish patterns just keep piling up. On monthly charts, the Russell finished off June with a bearish outside reversal formation and the last three times we saw these patterns on monthly charts, they represented tops that took several months to retest. And that’s not the scary part: the unsettling thing to remember is that those last three patterns took place during a remarkable 5-year bull market rally, whereas this latest formation emerged alongside the official bear market designation. That’s right...small-cap stocks joined the Dow this week in bear market territory, which is recognized as a 20% decline off the highs.

Now that the Russell has sliced through 690/688 critical support with ease, the next key test is at 660. Below that point, there is token support at 650, and critical support at 643. A breach of the latter would suggest that small-cap stocks are embarking on yet another leg down for the bear market move, which is a scary proposition. In one of the earliest columns of the year, I wrote that typical recession bear market moves in small-caps yield declines on the order of 40%, and if we take out the March lows with conviction then the debate about the economic condition here in the U.S. will likely hit a fever pitch.

It should be noted that the market is oversold in the wake of last week’s stunning collapse. The daily 14-period Relative Strength Index (RSI) is now below 30 and at the lowest point since the March bottom. Typically, a daily RSI below 30 is considered oversold and heightens the potential for a corrective bounce, or a stall in the downtrend trend via time. However, weekly RSI readings are at 37, and the January bottom didn’t play out until the RSI was at 32, and the March bottom until it hit 34. Please note that oversold readings are simply tools to keep a watch on momentum – in extreme cases, readings can plunge well through what are considered “textbook” overdone levels.

The market has now closed below opening levels on weekly charts for five consecutive weeks, something that hadn’t happened in more than three years. With the market oversold it seems unlikely that we would get another red candle this week, but then again I thought the odds favored the same approach last week and the bears sold with abandon anyhow. If we stay above 660 early in the week, then I think the most likely course of action would be a range between 660-680 (consolidation weeks tend to have smaller ranges). However, if the Russell tumbles through 660, then another dramatic collapse toward 645 and the March lows can’t be ruled out.

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
-  743.49   previous Aug. ‘07 collapse low; short-term support violated, now resistance;
            Also near chart gap left by Jan. 2008 employment report news 
-  720.50   recent trading range; chart support lows
-  715.56   20-day moving average
-  712.50   chart-related support zone; short-term area to watch
-  707.18   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 and July 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
>  665.78   July 3 close; lowest since March 19
-  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.

The economic calendar this week is an absolute snooze fest. Although there are several releases on the docket, none of them pack much punch. The biggest report will likely be Thursday’s weekly claims data, and that won’t be much of an issue since the monthly jobs report is now out of the way. In fact, the economic data will likely take a backseat to a couple of appearances by Federal Reserve Chairman Ben Bernanke, who will be making an appearance Tuesday and Thursday. In addition, other Fed officials will also give an update on the economy, which should prove interesting following the employment report.

The table below highlights calendar event risk for the coming 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)

3                Fed’s Yellen gives econ outlook (Mon., 11:00 a.m.)
4?               Fed’s Bernanke @ FDIC forum – INVITED (Tues., 8:30 a.m.)
1                Wholesale Inventories (Tues., 10:00 a.m.)
2                Fed’s Lacker gives econ outlook (Tues., 12:30 p.m.)
0                Consumer Credit (Tues., 3:00 p.m.)
3                Weekly Claims (Thurs., 8:30 a.m.)
4?               Fed’s Bernanke @ Congressional testimony (Thurs., 10:00 a.m.)
1                Fed’s Yellen @ community leaders luncheon (3:30 p.m.)
2                International Trade (Fri., 8:30 a.m.)
1                Import Prices (Fri., 8:30 a.m.)
2                Michigan sentiment (Fri., 10:00 a.m.)
0                Treasury budget (Fri., 2:00 p.m.)