Russell 2000: Still bullish, but at key test into big data week

    Small-cap stocks have been in recovery mode for the last three weeks after bouncing off a familiar value zone that corresponded with the market bottoms in both January and March. The Russell 2000 (NYSE:IWM) is now testing important resistance in the 725 zone that thwarted rallies off the January recovery and must keep things together during a key week to maintain the bullish chart structure.

    The market faces a stretch of important economic data this week that could go a long way toward suggesting that the worst of the news has been discovered, or that things are still a long way off on any road to recovery. If the chart structure can vault through logical resistance next week from 718 to 725 amid positive economic news, then it would help validate the July bottom and launch small caps toward the next resistance zone near 750.

    However, if the market stumbles through the data this week and slips back below 685 (and 677), then it would damage the bottoming argument and could easily spark a push back toward the July lows. As we’ve said before, the foundation from the July bottom is not as powerful as the one formed back in March (triple bottom vs. double bottom) and therefore the quicker the market can push higher, then the more breathing room it provides to the chart health.

    The recent bounce in stocks has carried an extremely high correlation to a pullback in crude oil prices. There is a magnificent double top on crude oil charts off the recent highs and it absolutely matches perfectly with the recent bottom in small-cap stocks. However, it should be noted that price action in crude oil and stocks is NOT a zero sum game. Despite all the hand-wringing over oil prices, the stock market rallied in tandem with energy from March to June. However, it does appear that when crude oil gets above $135 dollars a barrel, the stock market quivers. If you are thinking that the correlation between crude and stocks will remain tight for awhile, then it’s worth noting that $115 to $125 corresponds with chart support for crude.

    Looking at short-term charts, the price action is a little top-heavy on daily studies, but the market is trying to hold above the 100-day moving average off a rally, which hasn’t happened since April. If successful, it could easily power a move toward 750 either next week or the week after.

    On weekly charts, I’m a little troubled by the pullback off the highs this week. I can’t find another candle in the past three-plus years that projects a similar pattern where a green candle rallied 35 handles off the lows, then gave back half that gain on the close. We expected 726 to pose a problem for the bulls and if the market sinks early next week, things could get really ugly by Friday afternoon.

    So, the overall chart picture right now shows a mild bottoming pattern with three consecutive higher weekly closes off critical long-term support. However, the formations are tenuous and any slide back below 700 (and below) next week could seriously damage the bottoming picture off the July lows.

    The table below contains support and resistance points for the Russell 2000 to keep in mind heading into next week’s trading activity. 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. Keep in mind that when the market is near record highs, it is much easier to find valid support than resistance points.

TECHNICAL ANALYSIS SUPPORT/RESISTANCE POINTS FOR RUSSELL 2000

-  890.16   upward channel resistance on monthly charts off five-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 to December 2006
-  775.03   61.8% Fibonacci retracement of the Aug. 2007 peak to 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
-  711.06   20-week moving average; nice trend support for bull run; smashed on
            July/August 2007 collapse
-  710.34   July 25 close
-  700.00   “figure” swing line; no monthly close below here since Dec. ’05 until Feb. ‘08
-  685.87   20-day moving average
-  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
-  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
-  647.37   July 15, 2008 low; approximate triple bottom with Jan. ’08; March ‘08
-  643.35   recent move low set March 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 is busy this week, back-weighted toward Thursday/Friday and highlighted once again by the monthly employment report Friday morning. In addition, Tuesday’s consumer confidence report, Wednesday’s ADP employment survey and Thursday’s GDP report could all stir volatility into the stock market.

    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 FOR THIS WEEK

RISK FACTOR     REPORT/ITEM (all times Eastern)


Fed’s Mishkin “communications strategy” (Mon., noon)
Case/Shiller Home Price Index (Tues., 9:00 a.m.)
Consumer Confidence (Tues., 10:00 a.m.)
             ADP Employment Report (Wed., 8:15 a.m.)
             GDP (Thurs., 8:30 a.m.)
ECI (Thurs., 8:30 a.m.)
Weekly Claims (Thurs., 8:20 a.m.)
Employment Report (Fri., 8:30 a.m.)
ISM Manufacturing Survey (Fri., 10:00 a.m.)
Construction Spending (Fri., 10:00 a.m.)
3                Vehicle Sales (all day)   

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