Since Nov lows, small caps rule
With the market tumbling back into shouting distance of the November bear market lows amid a crisis of confidence about the bank bail-out plan and a cacophony of worries about the time needed for stimulus plans to resuscitate the economy, a silent supportive performance element is playing out. If you’re wondering where the silver lining is in the current stormy weather, wonder no longer: small-caps are putting up a better fight than their big-cap brethren—and that’s a mild good sign for the market.
Right about now, diehard market watchers might be saying, “Hey, wait a second...the Dow is down 10.5% in 2009 and the Russell 2000 (NYSE:IWM) is off 10.2%, and getting bullish over three-tenths of one percent is silly.” While that ’09 comparison might be true, here’s the rub: the Dow is only 5.3% above the November lows, meanwhile, the Russell is actually up 20.8% from their November lows.
One of the hidden bright spots in the recent sobering price action for the stock market has been this relative out-performance in small-caps vs. large caps. This week the Dow crashed through the previous January pullback lows and notched the lowest close on daily charts since those major November lows were forged. Yet the Russell remains well clear of the January lows.
Why is it good to see small-caps holding up better on this latest test of buyer resolve? Because when the market collapsed back in September, small-caps led the panic sell-off; this time around, as the market teeters on the verge of retesting the bear market lows, it serves up some modicum of comfort to see small-caps not leading the bearish charge at this juncture.
Looking at this past week’s price action, the market basically confirmed the recent trading range that has been in play since mid-January. Until we see a decisive breakout through 474 or a downside breach of 431, then the most likely course of action is a continuation of the trading range status quo. If you are waiting for a trending breakout, it’s probably like watching paint dry (although day-to-day volatility is still lofty for a range-bound market).
If the market can muster a breakout move, then it would carry a 43-handle target run based on the range parameters. For now, it would be good simply to see the Russell start to consistently trade above our small-cap “Mendoza Line” of 450, while building this long-term bottoming foundation. We said back in November when the lows were made that upside potential finally outweighed downside risk, and we also cautioned in the following weeks that we could see an extended elongated trading range to hammer out this recession low. Nothing has happened yet to change that outlook. And even though it was quite scary this week to see the Dow back at the lowest daily closes since the November low, the bulls nibbling for long-term value here in small-caps can take some mild consolation that the move this time was NOT paced by the Russell 2000.
The table below contains support and resistance points for the Russell 2000 to keep in mind heading into this week’s trading activity. 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. Keep in mind that when the market is near record highs, it is much easier to find valid support than resistance points.
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
- 500.00 logical big “figure” swingline
- 491.15 swingline of note; former resistance bounce peak
- 475.15 20-week moving average; nice trend support for bull run; smashed on
July/August 2007 collapse
- 473.14 late November congestion range peak
- 452.84 20-day moving average
- 450.00 small-cap “Mendoza Swingline”
> 448.36 Feb. 13 close
- 442.10 previous bear market low set Oct. 28, 2008; bullish reversal on daily charts
- 433.36 Nov. 13; bullish reversal on daily charts
- 430.00 figure point near 50% “recession target” pullback
- 427.66 61.8% Fibonacci retracement of Nov-Jan rally
- 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 ‘08 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 is fairly brisk this week. In years past, a week sporting CPI and PPI would be a big deal, but the market isn’t exactly focused on inflation right now. This is the lowest risk factor I can remember ever assigning the inflation reports. The FOMC minutes can have a sneaky way of hitting the market in the final hour of trading and are worth keeping on the radar this week. Federal Reserve Chairman Ben Bernanke makes an appearance, which often leads to volatility (although perhaps less so with the Fed funds target basically a non-event nowadays). Look for the housing starts report Wednesday and weekly claims Thursday to be potential keys for short-term activity.
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
(MARKETS CLOSED MONDAY FOR PRESIDENT’S DAY HOLIDAY)
RISK FACTOR REPORT/ITEM (all times Eastern) Consensus
1 NY Manufacturing Survey (Tues., 8:30 a.m.) -24.0%
1 Fed’s Bullard “non-traditional policy” (Tues., 1:05 p.m.)
4 Housing Starts (Wed., 8:30 a.m.) 530,000
1 Import Prices (Wed., 8:30 a.m.) -1.5%
1 Fed’s Pianalto “economic stress” (Wed., 9:00 a.m.)
3 Industrial Production (Wed., 9:15 a.m.) -1.4%
4 Fed’s Bernanke “Fed’s balance sheet” (Wed., 1:00 p.m.)
4? FOMC Minutes (Wed., 2:00 p.m.)
3 PPI (Thurs., 8:30 a.m.) 0.2%
4 Weekly Claims (Thurs., 8:30 a.m.) 615,000
1 Leading Indicators (Thurs., 10:00 a.m.) 0.0%
2 Philly Fed (Thurs., 10:00 a.m.) -25.0%
1 Fed’s Lockhart on the economy (Thurs., 1:15 p.m.)
2 CPI (Fri., 8:30 a.m.) 0.3%
