Small caps stuck in bearish cycle behavior

    Small-cap stocks had a wild roller coaster ride Thursday and Friday, rallying out of the depths of despair (otherwise known as new bear market lows) on Thursday, then giving back almost of that gain on Friday’s collapse. In the end, the Russell 2000 (NYSE:IWM) generated the lowest weekly close since August 2003, maintaining a powerful bearish chart stance on long-term studies.

    Weekly and monthly charts are unmistakably, undeniably, unwaveringly bearish. So, let’s focus on daily charts, where the activity is actually quite a bit more interesting right now. Daily charts show that the market has carved out three consecutive bullish reversal moves off new bear market lows since early October, only to stall the reversal shy of previous highs. It gets really eerie –- like Twilight Zone eerie -- when you count out the timing between the bullish reversal lows and see that exactly 12 trading days took place between the moves. If history holds up, then we’ll see a new low on Dec. 2. Now, while the market does tend to develop symmetrical trading patterns and behavior has a way of repetition, I am not saying that we’ll get those new lows come Dec. 2. But what I am saying is that the market is stuck in mode of forging lower lows and lower highs, which is consistent with bearish price behavior. Until we break that cycle of lower lows and lower highs, then it will be difficult to stand behind a reversal pattern (especially one relegated to daily studies) with any conviction. So, if the Russell can mount a decisive rally away from current levels and push back above 551, it would break the bearish behavior cycle and spark a more dynamic discussion of bottoming potential.

    It’s interesting to see where this week’s fresh low came in: 433, just three handles off our rounded number recession target low we first mentioned way back in March. In the context of surreal price declines, three handles fits the bill for “good enough” (if you’re a diehard stats person and want the exact number, 428 represents a . . .

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