Friday bounce a hollow victory

Kevin Pendley | Jan 23, 2009 7:46pm EST | Comment

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Market tension Friday morning was palpable. Even decent earnings reports from some of the big boys such as Google, Inc. (Nasdaq:GOOG) didn’t seem to stem the opening selling tide. Thankfully, the Russell 2000 (NYSE:IWM) was able to generate a recovery rally off the morning trough and put something of a happy face on another difficult week for investors. However, the bounce Friday afternoon off 7-week lows for small-caps was a hollow victory. The market still generated the second lowest close in more than five years on weekly studies and must fight back through 450 quickly next week or risk a deeper slide and potential retest of the November bear-market lows.

With European stocks at five-year lows the U.S. market needs to stabilize soon. Bellwether stock General Electric Co. (NYSE:GE) stumbled to a new closing low Friday, supporting the whole “retest the lows” theme. Looking at recent chart studies, the 61.8% retracement line of the November-January bounce comes in at 427.67 and is an important point to hold if the market starts to wobble again early in the week.

Interestingly, the market has now closed below opening levels on weekly candlestick charts for three consecutive weeks, something that occurred twice before during the freefall that started back in September. The market has NOT closed lower than the opening four consecutive weeks – even during the teeth of the slide. It would be disconcerting to see that pattern broken this week, especially since the pullback moves have been smaller in stature since the initial September-October swoon.

The Russell 2000 most likely will spend a week or two trading within this week’s lows at 431.25 and the January peak of 518.86. A breach of 427 would clear the way for a very quick run down to 416, which marked a double bottom on the charts from the first pullback off the rally from the November lows. There is no convincing support between 416 and 371.30, although the “figure” at 400 would make for a logical pause zone. In order for small caps to spend the majority of 2009 trading between 450 and 550 (which is our goal), the market really needs to climb back above 450 soon. Last week we favored an upside push if 453 support held, and it did not. This week, I have a mild upside bias with a tight leash at 439; a weekly range between 440 and 490 makes sense if that point holds. If not, then 416 could be on the doorstep painfully fast.

The table below contains support and resistance points for the Russell 2000 to keep in mind heading into the coming week’s trading. For long-term traders, some of these key levels may remain in place for weeks or even months at a time. Those with a short-term horizon will lean toward levels that are more immediately in play. As time passes, we will build upon this table with levels that come into focus as important testing zones for trend analysis, and to act as road mark indicators for key reversal patterns.

From a trading perspective, I always keep a printout handy each day of my key support and resistance points for any stock or market I’m trading. It helps remind me of key areas to watch for signs of trend exhaustion, and also for potential entry/exit points for trades.

TECHNICAL ANALYSIS SUPPORT/RESISTANCE POINTS FOR RUSSELL 2000

- 890.16   upward channel resistance on monthly charts off 5-year run;
            also fits with potential upside breakout of congestion zone
- 860.00   projected “figure” resistance off 15-handle testing zones on the ’06 rally
- 856.48   record intraday high set July 13, 2007
- 855.77   July 13, 2007 close; record high daily and weekly close
- 852.06   Oct. 11, 2007 high; bearish reversal peak on daily charts
- 830.01   previous high from the February 2007 peak; key swing line of note
- 815.00   key swing line
- 801.00   congestion resistance zone from November-December 2006
- 775.03   61.8% Fibonacci retracement of the Aug. 2007 peak-Mar. 2008 collapse
- 764.38   new move high set August 15, 2008; approximate double top with June ‘08
- 762.89   previous move high set June 5, 2008
- 760.06   March correction low; key approximate double bottom formation support;
            Near 50% Fibonacci of July ’06-’07 bull run; violated in November ’07;
            Key swingline to watch
- 743.49   previous Aug. ‘07 collapse low; short-term support violated, now resistance;
            Also near chart gap left by Jan. 2008 employment report news
- 726.19   previous double top in June/July 2008
- 720.50   swing point
- 700.00   “figure” swing line; no monthly close below here since Dec ’05 until Feb ‘08
- 685.00   20% decline off 2007 record highs; breached Jan. 2008, July 2008, Sept. ‘08
- 680.94   mild reversal low on daily charts Jan. 28; near 50% of the March ’08 bounce
- 668.58   July 2006 low; important bottom for summer correction; now resistance
- 660.00   short-term downside target on wedge breakout; now swing line
- 650.00   previous bear market move low set Jan. 22, 2008, former critical support zone
- 647.37   July 15 2008 low; approximate triple bottom with Jan ’08; Mar ’08; snapped
            October 2008
- 643.28   previous move low set Mar. 10, 2008; now resistance
- 614.76   October 2005 bottom; now resistance on a bounce
- 606.42   April 2004 highs; now resistance
- 577.00   consolidation zone when market was bottoming in spring 2005
- 570.06   absolute low on spring 2005 bottom; now resistance
- 551.00   short-term resistance from daily charts in October 2008; early Nov. peak
- 514.50   swing line
- 510.54   20-week moving average; nice trend support for bull run; smashed on
            July/August 2007 collapse
- 500.00   logical big “figure” swingline
- 491.15   swingline of note; former resistance bounce peak
- 475.00   20-day moving average
- 473.14   late November congestion range peak
> 444.36   Jan. 23 close
- 442.10   previous bear market low set Oct. 28, 2008; bullish reversal on daily charts
- 433.36   new bear market bottom set Nov. 13; bullish reversal on daily charts
- 430.00   figure point near 50% “recession target” pullback
- 416.13   recent congestion zone trough
- 406.54   Nov. 21 close; lowest weekly close since April 2003
- 400.00   figure support matches with trading zone from 2002-2003
- 385.31   lowest daily close for the 2008 collapse
- 371.30   Nov. 21 bear market bottom; bullish reversal on daily charts
- 354.00   approximate value zone when market was bottoming in 2002
- 324.90   October 2002 bear market low

In addition to the printout of support and resistance points to watch, I also like to keep in mind where sudden volatility can spring into the trading mix from the typical release of economic data and Federal Reserve activity.

The economic calendar picks up steam this week, highlighted by Friday’s GDP report and several data updates on the housing front. In addition, the FOMC will meet mid-week to discuss the economy and interest rate policy; while it might seem like a yawner since we’re basically at zero for the Fed funds target, it could be interesting to see if the Fed is still publicly exploring other methods of “goosing” rates lower, especially after seeing mortgage rates climb recently.

The table below highlights calendar event risk for next week, with the emphasis on various economic reports. Our table below has a special “Risk Factor” designation, which is simply my assignment of risk to that event, ranging from 0 to 5, with 5 marking the highest risk for volatile market swings.

CALENDAR EVENT RISK ASSESSMENT

RISK FACTOR REPORT/ITEM (all times Eastern) Consensus

1           Leading Indicators (Mon., 10:00 a.m.)                 -0.3%
4           Existing Home Sales (Mon., 10:00 a.m.)                4.40 million
3           Consumer Confidence (Tues., 10:00 a.m.)             39.0
4?          FOMC statement (Wed., 2:15 p.m.)                     0.125%
2           Durable Goods Orders (Thurs., 8:30 a.m.)               -2.0%
4           Weekly Claims (Thurs., 8:30 a.m.)                         580,000
3           New Home Sales (Thurs., 10:00 a.m.)                     400,000
5           GDP (Fri., 8:30 a.m.)                                           -5.3%
1           Employment Cost Index (Fri., 8:30 a.m.)                   0.7%
2           Chicago Purchasing Manager’s Survey (Fri., 10:00 a.m.)  34.9
2           Michigan Sentiment (Fri., 10:00 a.m.)                       61.9