A fascinating battle will play out Monday morning in small-cap stocks between the heroic comeback forged on daily charts by Friday’s valiant recovery rally versus the dominant bearish chart patterns in play on weekly studies. Kind of like a Russell 2000 (NYSE:IWM) chart version of the tortoise versus the hare.    

There are very powerful and legitimate contrasting chart patterns visible on both daily charts by Friday’s price action and on weekly charts from the overall moves last week, and they are NOT complementary. On daily studies we see a bullish “hammer” pattern formed by the massive rebound off the morning lows and the close near session highs. These formations are often seen at the bottom of an important low in stocks. However, Friday’s lows weren’t exactly at the bottom of the market and these patterns require immediate confirmation via higher price action the following day. In this case, we’ll see just how the market responds on Monday morning.

In contrast to the bullish hammer on daily candlesticks, we see a bearish outside formation on weekly charts. Outside patterns on weekly reference points are relatively rare. We haven’t seen a bearish version of the outside reversal since October 2007. Guess how long the top from that reversal pattern held up? Well, we haven’t been back to that high yet...

In addition, small caps shed 11% from high to low off that pattern in the next four weeks, so it’s a little disconcerting to see a similar bearish pattern now in play at a time when the market desperately wants to break free of the range and to validate the recovery move off truly awful economic data from the jobs report Friday. However, if we don’t get a very fast, very dynamic, very convincing rally right away Monday then the daily chart bullish pattern quickly sheds power to the bearish weekly formation...

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