Russell 2000: Look for opportunities, not trends

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In last year’s annual recap/outlook column, I fretted that the chart pattern resembled the topping formation we saw back at the end of 2000. Now that we have played out one of the most painful bear market collapses in market history, we come into 2009 with three intriguing scenarios: Will the market sink into a 1930s style depression environment? Will we see a chart pattern remake of the 1958 recovery surge? Or, will we move into an extended 1970s-style trading environment?

From a strict charting standpoint, the 2007 year-end formation was actually a much more interesting and dynamic pattern than what we see at the end of 2008. The doji-style top in 2007 made for a reasonably powerful warning signal about 2008. This year, the market simply shows a runaway bearish continuation pattern. Instead of turning points, these types of patterns typically become more about tracking the progress of support and resistance zones, and testing retracement lines to provide clues about the end of the bear market cycle.

Before we dig into the heart of this year’s annual chart study, there are a couple of “style” points to note. First, you’ll see that most of my historical reference utilizes the Dow; simply put, the Russell 2000 didn’t exist 80 years ago. Also, on the charts that accompany this column, you’ll see that I have broken down the Dow charts into various shorter time frames; if I ran all the data together, the charts lose perspective because of the massive appreciation in the Dow price series over the last 25 years. It’s quite interesting to see the various yearly patterns on their own merit. I have also...

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