Russell 2000: Good news, bad news on charts

Kevin Pendley | Jul 12, 2008 11:12am EDT | Comment

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There is good news and bad news on the chart picture after this past week’s action. For now, the good news is slightly better than the bad news – but only by a diminishing nose. The first obvious bit of good news: small-cap stocks FINALLY closed out a week above opening levels, which hadn’t happened in an extraordinary run of five consecutive weeks. Even the worst bear market moves don’t usually serve up that kind of relentless beating on the bulls.

Another bit of good news – and it’s a perverse bit of logic, but bear with me here: we finally saw volatility ramped up during this week’s hectic action. If you’ve been whipsawed by the manic price moves this week you may be in no mood to think about the good of volatility (especially if you sold Fannie Mae or Freddie Mac early Friday morning), but it’s worth noting that when the market pounded out a bottom in both January and in March, volatility levels shot higher. During the slide off the Junehighs, volatility levels, as measured by the CBOE’s Volatility Index (VIX) never really amped up because the move was steady and sure...not really whippy. Unfortunately, the VIX is still well off the spike highs seen in January and March, but the breakout move is reasonably similar on charts.

And finally to round out the “good news” front, we saw a bullish outside reversal on
Russell 2000 charts Friday. This marked the most impressive bullish formation on daily studies since the breakdown off the June highs. While it lacks the punch of a reversal formation on longer-term weekly studies, it is still a powerful short-term pattern that commands respect.

Now for the flip side. The market is trying to find a bottom in the same general price zone that sparked recovery moves back in January and again in March. You might wonder why that is bad news; after all, the market is finding support at a previous value zone. Yes, that’s true, and it’s certainly better than trying to find support 5% below those previous lows. However, this means that weekly charts now sport a potential triple bottom. As I’ve said numerous times before in this column: double tops and bottoms are powerful, triple formations are usually vulnerable. In fact, that double bottom on weekly charts back in March prompted us to get bullish well before most market-watchers were willing to get positive.

This time around, I’m less impressed with the patterns. However, if the market can rally impressively off this zone, push through 690 on the upside and maybe even tackle “figure” resistance at 700, I’ll be less leery of the budding triple bottom. That said, if we slip through 650 this coming week, we could trigger another leg down in the bear market.

The most likely course of action this week would be a range between 661 on the downside and 690 on the upside. However, if the market gets bloodied early in the week when we get a host of key economic reports then things could get away from the bulls very quickly.

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
- 712.50   chart-related support zone; short-term area to watch
- 705.04   20-week moving average; nice trend support for bull run; smashed on
            July/August 2007 collapse
- 700.76   20-day moving average
- 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
> 674.95   July 11 close
- 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 picks up steam this week, highlighted by Tuesday’s inflation and consumer spending data, and further punctuated by monetary policy testimony Tuesday and Wednesday by Federal Reserve Chairman Ben Bernanke. 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)

5              PPI (Tues., 8:30 a.m.)
4              Retail Sales (Tues., 8:30 a.m.)
2              NY Manufacturing Survey (Tues., 8:30 a.m.)
1              Business Inventories (Tues., 10:00 a.m.)
5              Fed’s Bernanke Senate testimony (Tues., 10:00 a.m.)
1              Fed’s Yellen speaks at foreclosure conf. (Tues., 3:30 p.m.)
2              CPI (Wed., 8:30 a.m.)
3              Industrial Production (Wed., 9:15 a.m.)
4              Fed’s Bernanke House testimony (Wed., 10:00 a.m.)
5              FOMC minutes (Wed., 2:00 p.m.)
2              Fed’s Hoenig on econ outlook (Wed., 2:00 p.m.)
3              Housing Starts (Thurs., 8:30 a.m.)
4              Weekly Claims (Thurs., 8:30 a.m.)
3              Philly Fed Survey (Thurs., 10:00 a.m.)