Body blow or head fake?

Small-cap stocks fell 3% this week, generating downside follow-through on the bearish cloud cover pattern we discussed in last week’s column while solidifying the worrisome reaction to monthly employment numbers. Now that we’ve paid the short-term toll to the ferryman on the previous week’s patterns and price action, we move into a holiday-shortened affair this week with a slight moderation on the immediate pattern study.

The market left a nice bullish reversal pattern Thursday by slipping to short-term move lows, then closing higher. The formation resembled a “hammer” bottom on daily charts and that same formation is even more visible on weekly studies. The question now is whether the breach of 450 this past week was the first body blow to value investors at that level, or a “head fake” slide that served up a buying opportunity?

Thursday’s bullish reversal formation in the Russell 2000 (NYSE:IWM) will hold true as long as 453.25 holds up. Since the pattern was built on daily studies, it’s only worth focusing on for this week’s action. However, as you can see on the attached charts, the hammer on weekly studies sports a similar worrisome breach of a little channel ...

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