On Tuesday morning, July 15, 2008, life as we knew it was about to change. Panic selling swept through the stock market as words like “systemic risk” and “bank failure” trembled off the lips of market pundits. The mighty government-sponsored firms that tower over mortgage lending in the United States were seen as suddenly insolvent, and they were just going to be one of the early dominoes to fall. The Dow was at 2-year lows. The S&P 500 was at the lowest point since October 2005. Then something truly dramatic happened... the market rallied back from the depths of desperation.

It might be hard to believe, but the Russell 2000 (NYSE:IWM) was actually HIGHER last week, gaining 18 handles, or more than 2.6%. What’s more, the recovery rally was stamped out from the shadow of 4-month lows in the Russell 2000. When it was all said and done, small caps forged an impressive “outside” bullish reversal on weekly charts. The outside terminology refers to a price range that extends beyond the boundaries of the previous time period under study. These patterns are extremely rare – especially at the bottom of a bear market move - and they are considered reliable and powerful reversal indicators. This is the most convincing bottoming pattern seen on weekly Russell charts since the double bottom back in March.

When looking at the CME’s small-cap 600 Index chart, there is an even more rare “key” reversal pattern, which is formed only when the market makes new lows, then closes above the previous week’s highs. What these formations suggest is that the market violently rejected new lows, which hints that a bottom is in play...

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