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?
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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 formation off the lows and a close back near that channel trough.
In the yearly outlook column a couple of weeks ago I reiterated the stance made back in November that I don’t expect a rapid “V”-style recovery move, and that we could be in for an extended trading range, which we’ve already been under for some time since the bottom in November and the correction peak in early January. It would not be a surprise to see most of this year’s range take place in the 450-550 zone, which puts a premium on a trader mentality (the old “buy low, sell high” mantra), but which can be exasperating for long-term trend followers. Back in November I also said that near the lows we have balanced out fear and greed and that upside potential exceeds downside risk. I realize that this extended range we are in can fray patience, but I still stand by that analysis from way back then.
That said, in the short run, it is vital for the support area along 450 to hold up. I don’t picture another breach of 450 will find quite as quick a recovery move as we saw this past week. In fact, there is very little convincing support below 450 all the way down to 416. It is quite possible the market will want to test 416 at some point in the coming months; if we get another breach of 450 it could happen sooner rather than later.
There are some worrying subplots to the ongoing stock market saga. For one, bank stocks made a new move low this week. There are plenty of market watchers who insist that the overall market won’t go into recovery without financials leading the way; right now, financials are pointing lower. However, I can readily embrace the argument that these are simply different times now for banks. My preferred sector to watch right now is homebuilders. They had a decisive top on weekly charts way before the overall market top. I would love to see a dynamic bullish reversal on weekly or monthly charts to point the way out of this mess. But for now, it’s just not there yet for homebuilders. They are also stuck in a consolidation mode just like the Russell 2000, hoping that the market is forging a bottom, but lacking a pattern to confidently hang our hats on.
Looking ahead to this week’s action, the market will be on holiday Monday, then everyone will likely be distracted Tuesday watching the historic inauguration of Obama as the 44th President of the United States.
From a price standpoint, the most likely course of action in the coming week would be a rally toward 491, especially if the 464 zone holds up on the opening Tuesday and the market rallies away off that line. However, if the aforementioned 453.25 area is taken out early Tuesday, then we could see a jarring freefall toward 416, which would make for a disconcerting first week of the Obama presidency.
The table below contains support and resistance points for the Russell 2000 to keep in mind heading into this week’s trading. For long-term traders, some of these key levels may remain in place for weeks...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
- 525.33 20-week moving average; nice trend support for bull run; smashed on
July/August 2007 collapse
- 514.50 swing line
- 500.00 logical big “figure” swingline
- 491.15 swingline of note; former resistance bounce peak
- 481.78 20-day moving average
- 473.14 late November congestion range peak
> 466.45 Jan. 16 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.
This week’s economic calendar will hold up throughout 2009 as one of the lightest of the entire year. There is a holiday on Monday and no economic reports until Thursday morning, when we get Weekly Claims and Housing Starts ahead of the open. What’s more, there are no Federal Reserve speakers on the slate. This week will be all about politics and earnings.
The table below highlights calendar event risk, 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
3 Housing Starts (Thurs., 8:30 a.m.) 610,000
4 Weekly Claims (Thurs., 8:30 a.m.) 553,000
U.S. MARKETS ARE CLOSED MONDAY FOR MARTIN LUTHER KING, JR. HOLIDAY
