Baby steps

Baby steps. I know we live in an instant gratification world nowadays, but I find some minor solace in tiny shifts of price action behavior on the small-cap Russell 2000 (NYSE:IWM) charts lately. Yes, we are still in a bear market. No, we are nowhere near putting an official end to that bear market.

Because of the manic speed of the collapse that was triggered in September, many were anticipating a “V” style recovery move. In a “V” bounce, the move back up is often as rapid and breathtaking as it was on the way down. However, instead of a “V” recovery move, we are likely seeing a more elongated bottoming process (at least we hope it’s a bottom). These types of patterns are known as a “U” or even “L” shape process as they take more time to unfold.

Just from a simple market behavior pattern, I find it encouraging that the small-caps have veered away from the previous pattern of sudden freefalls and then oversold bounces that fail quickly and yield to deeper lows. In fact, any breach of those price patterns that accompanied the September-November collapse is very welcome. One key element of that bearish cycle behavior – making lower lows and lower highs – came under some attack this week as the previous bounce high of 491 was breached, but not on a closing basis. If we can see a decisive daily close above 491 it would add to the ongoing bottoming process.

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