Russell 2000: Double top dominates immediate picture

Small-cap stocks retreated this week off the bearish reversal top on daily charts from the fresh move high August 15. As we noted in last week’s column, when a market makes new highs, but closes lower, it signals a key failure and falls under the description of a bearish reversal. What’s more, that pullback left a disconcerting double top in sight on weekly charts, as the August 15 peak corresponds fairly tightly with the big top formed back on the June rally. Even though the market had a “feel good” finish to this week’s trading via Friday’s 1.7% bounce, the Russell 2000 (NYSE:IWM) still faltered 2% for the week and did little to negate the budding double top formation.

One positive element in play was that the market repeatedly fought back selling interest in the 726 zone, which was a support point on short-term studies. If we see a more decisive breach of 726 in the coming week, then that will put small-caps on tenuous footing.

This week’s pullback halted an impressive string of bullish candles on weekly studies; the Russell had closed above opening levels for a dazzling run of six consecutive weeks, a show of strength that is unheard of in even the most powerful bull market runs. Still, in order to ease the concerns tied to a potential double top, the market needs to quickly climb higher, or embark on a sideways consolidation that over time diminishes the double top formation...

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