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...

For access to the full article, you must be a registered member - it's FREE.