Loyal readers of this column will remember back in March I wrote a piece that examined stock market declines in recessionary frames dating back more than 30 years. The basic equity collapse during recessions tends to wind up in the 50% zone (for reference, small-caps tumbled 47% in the 2000-2001 bear market recession). At Friday’s low, the Russell 2000 (NYSE:IWM) was down 46% and a rounded off 50% recession target is at 430, or about 8.5% below current values. I realize 430 seems cruel after what we’ve already endured, but as you’ll see below there are legitimate chart formations in play that also carry a target down to 415. But if this recession collapse starts to peter out in the 50% zone, then at 450 or so the temptation to consider low-risk buy-side market approaches makes some sense – at least mathematically.

OK, so we’re fast approaching historical recession bear market norms and the market is dramatically oversold, but another tantalizing detail comes from a seasonal standpoint. Simply put, October is a great month for the market to stage major bottoms. We have seen key small-cap lows forged in the month of October in 2005, in 2002, in 1999, in 1998, in 1992 and in 1990. And in 2001, the low was set in late September. So there you have it: the seasonal is favorable, the market is ripe for a bounce given overdone momentum readings and the declines are approaching our recession targets.

Once again we find the Russell 2000 (NYSE:IWM) back in a range, and just as quickly as the market challenged move-highs last week, this time around the index is back toward the lower portion of the range. As you can see on weekly studies, the Russell is basically biding time between 690 on the downside and 750 on the upside. Until we see a decisive breakout move above that zone, there is little reason to favor the bullish side of the argument – especially after last week’s big bullish reversal apparently had no teeth.

From a pattern perspective, the dominant chart formations remain bearish in nature, especially if you are willing to ignore last week’s upside push as an anomaly. Although I prefer not to ascribe subjective interpretations to chart patterns, the extreme volatility, wacky news, and - most important – the quick failure off last week’s bullish reversal make it more difficult to embrace.

Yep. You read that right. After suffering the two largest one-day declines of the year while the Dow was blitzed by the largest swoon since the 9/11 attacks seven long years ago, small-cap stocks rebounded late in the week to close at the highest weekly level since last December.

Actually, “rebounded” is probably too tame to describe the stunning rally that took place Thursday and Friday in the stock market. We can debate until we’re blue in the face whether or not the government has any business rescuing financial firms from the brink, and whether or not they should restrict short selling practices, but the fact is that on a weekly basis NEARLY EVERY SINGLE SHORT IS HOLDING A LOSING TRADE RIGHT NOW.

In addition to the obvious bullish equity position of the market at this moment, the pattern picture is pretty impressive as well. For starters, weekly charts sport a bullish outside reversal pattern off lows for the move. The last time that took place just happened to be the summer bottom that kicked off the run to the August highs.

Despite the relatively tame finish to a manic week, there are some interesting themes to investigate. Let’s start with the good news: first off, the market was able to grind out a mild advance even though most of the news had a decidedly bearish tilt. For instance, the fourth-largest investment bank in America -- Lehman Brothers Holdings Inc. (NYSE:LEH) -- was basically relegated to the scrap heap, apparently another potential casualty of the long-running credit crisis that has been gripping financial stocks for over a year now. What’s more, the world’s largest insurer – American International Group Inc. (NYSE:AIG) collapsed 47% this week, while LEH unraveled to the tune of 77%. And of course, that all took place just a few days after mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) became a government bail-out project. On May 2, 2008, those four stocks had a combined share price of $152.65; on Friday, they were worth all of $16.60. And on top of all that, the economic news wasn’t good. Continuing claims for unemployment paychecks approached a five-year peak; retail sales declined when everyone said they would rise and our international trade deficit ballooned to $62.2 billion, the highest in 16 months. Oh wait, this was supposed to be the good news part of the story!

There are very powerful and legitimate contrasting chart patterns visible on both daily charts by Friday’s price action and on weekly charts from the overall moves last week, and they are NOT complementary. On daily studies we see a bullish “hammer” pattern formed by the massive rebound off the morning lows and the close near session highs. These formations are often seen at the bottom of an important low in stocks. However, Friday’s lows weren’t exactly at the bottom of the market and these patterns require immediate confirmation via higher price action the following day. In this case, we’ll see just how the market responds on Monday morning.

In contrast to the bullish hammer on daily candlesticks, we see a bearish outside formation on weekly charts. Outside patterns on weekly reference points are relatively rare. We haven’t seen a bearish version of the outside reversal since October 2007. Guess how long the top from that reversal pattern held up? Well, we haven’t been back to that high yet...

In addition, small caps shed 11% from high to low off that pattern in the next four weeks, so it’s a little disconcerting to see a similar bearish pattern now in play at a time when the market desperately wants to break free of the range and to validate the recovery move off truly awful economic data from the jobs report Friday. However, if we don’t get a very fast, very dynamic, very convincing rally right away Monday then the daily chart bullish pattern quickly sheds power to the bearish weekly formation...

Even though August was a kind month to small-cap stocks, the chart structure is still dominated by bearish patterns. For instance, monthly studies show a potential head-and-shoulders top, while weekly and daily charts still sport the dynamic double top pattern off the June and August highs. If the market does not push through to new move highs relatively quickly, then these patterns form the perfect quicksand that could spell a gloomy entry to autumn.

Now that we’ve closed the door on August, we’re moving into a more difficult seasonal pattern. Those of you who have just started trading in the past few years might wonder “hey, what’s so bad about September?” While it’s true that the Russell 2000 has worked higher every September for the last four years, it’s also true that the market was down every September the four years before that! What’s more, those down years were far more dramatic than the recent rally years. Those last four September time frames saw an average gain of 1.7%--during a dramatic 5-year-plus bull market charge. However, the down years before saw an average decline of 6.4%. When September is ugly, it is often very ugly. In addition, those down years came into the teeth and then the shadow of the 2001 economic recession and the bear run in stocks. Although we are not in an official bear market in small-cap stocks at this juncture of 2008, at the lows we were below on the official 20% bear market declaration, and our large-cap brethren in the Dow and S&P 500 are still within easy breathing distance of that bear market designation.