Interesting Development on the Russell 2000

Aug 21, 2008: 9:14 PM CST

Something interesting is potentially about to happen on the Russell 2000 Small Cap index, and something quite impressive has already just happened.  Can you guess what occurred?

First, let me start by saying that the Russell came just points shy last week of eeking out a new high for 2008, but was successful in reaching a new 7-month high by a little over one index point.  Given the environment and rampant (news) bearishness prevalent out there, that is a remarkable accomplishment indeed.

That being said, there’s the potential for a strange confluence of support to occur at the 720 Index level from a variety of sources.

Let’s look at the Daily and Weekly charts, and then discuss some of these potential levels:

First, we have to classify the Russell 2000 as being currently in a technical uptrend, according to the daily chart structure, as price has made a higher high (June), higher low (July) and now made a higher high (August), confirming the trend reversal up (which, again, seems odd in the context of ‘recession’ and the like).

Second, we note a confluence of support via the 200 day SMA (at 720.59) and the 50 day EMA (at 718.62).  The 20 day EMA is just above price at 727.92 – notice the doji ‘buy signal’ at support which is being threatened by today’s downward action.

Finally, although I have not drawn it on the chart, the 38.2% Fibonacci retracement from the July bottom to 764 swing high sits exactly at 719.76 (close enough to call it 720).  It’s not often that such events cluster at the same level, and when it does, it could pay to take note.

Let’s pull back to the weekly chart for more possible confluences of possible support:

Eerily enough, the 20 week exponential moving average rests at 717.94 (718) and the 200 week simple moving average rests at 719.02.  There is also a potential Gann fan that can be drawn projected down (1 point per box) from the July price high that rests just beneath 720 as well (not shown).

Whether or not the 720 level holds is of course yet to be seen, but one might be wise not to ignore this possible confluence of support that could hold.  What’s interesting (at least to me) is that the S&P 500 and the Dow appear to be breaking downwards out of a possible wedge or channel formation on the daily chart, so it’s a little odd to get such a strong potential buy signal on the Russell at the same time.  One of these patterns is likely to fail, and I’m not ready to make my prediction yet.

Let’s continue to watch this index closely for possible early clues of strength or weakness, and try to play the subsequent move that occurs off or through this interesting inflection point.

2 Comments

2 Responses to “Interesting Development on the Russell 2000”

  1. Richard Says:

    The Russell 2000 shares, IWM, and especially the Russell 2000 value shares, IWN, have benefitted the most of all indices and sectors, with exception of the homebuilding stocks and biotechnology stocks, from the yen carry traders going long the US Dollar and buying the financial stocks beginning July 14, 2008, after they took profits on selling oil, USO.

    The Russell 2000 stocks are small US based American companies highly influenced by the financial sector; they got “goosed up” by the rally in the financial sector.

    They will now fall like a rock and manifest their traditional volatility as the finanical sector fails, greatly rewarding those who go short at this time.

    Like you point out 72 for the RUT is a significant number; it’s the middle of a ‘broadening top pattern’ that goes back February 27, 2006. It’s as Street Authority relates “when you see the broadening top, the market will eventually drop”.

    The Dow got knocked out of its ascending wedge by AIG’s need to recapitalize and likely downgrade by rating agencies.

    Given all this bearish development, I recommend that one most definitely go long SKF and possibly short FXP and EEV.

    I also recommend that one be invested in gold at BullionVault and GoldMoney.

  2. Don Da Mon Says:

    Was Aug 11-20 a bull flag for the S&P 500, not a break in in the triangle? Target 1350 perhaps? The Aug 11-20 period resembles April 2-14, doesn’t it?

    At 1350 we would remain in an overall down trend for the S&P. I see the current current rise in the S&P as just a bear flag in the overall downtrend.