In an interesting turn of events, the Russell 2000 “Small Cap” Index broke to new recovery highs last week in a sign of bullish strength, but now faces headwinds from the weekly 200 period moving average.

Let’s take a quick look at both the daily and weekly Russell 2000 chart to see what level we should watch for important clues as to the strength - or pause - in the recent strong rally.

Russell 2000 Daily:

In the daily chart, we see one of the most powerful sustained rallies on the Russell 2000, which gave us 16 “up” days and 3 “down” days since the early February low of 580.  The first rally witnessed roughly nine consecutive days of gains.

The current structure places us at new recovery highs above the 650 highs in January 2010, with a new momentum (oscillator) high confirming the recent bullish strength.

With that picture in mind, we would expect the Russell to continue its power climb higher, and it very well could, but it is going to have to content with a confluence resistance area that might give bulls pause.

Let’s take a look at the ‘triple’ confluence resistance area on the Weekly Chart.

The most obvious form of overhead resistance comes from the 200 week SMA (red) at the 675 level.  It would be absolutely key for the bulls to drive price back above the lengthy 200 week (roughly 4 year) simple moving average, as this level is an important psychological ‘mile marker’ on the charts.

Until then, it is possible for the average to hold as resistance.

There is a prior price line of support - which becomes resistance in the future - from the 650/675 level as seen in the triple price lows of early 2008.  According to the “Polarity Principle,” this prior support area could become a future resistance level… which is where we are currently.

And although I’m not showing it on this chart, the 61.8% Fibonacci Retracement of the 2007 high to the 2009 low rests at the 660 Index level, which is roughly where price resides currently.

To sum up the resistance areas…

675:  Weekly 200 SMA
650/675:  Prior Price Support in 2008
660:  61.8% Fibonacci Retracement

A break above 680/685 would likely be enough for a confirmed break depending on your threshold of “break,” which would suggest that odds favored a move back to the 750 level as marked on the chart above.

Let’s see what happens at these all-important boundary levels.

Corey Rosenbloom, CMT
Afraid to Trade.com

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It’s time for another quick update from the Disciplined Investor - Andrew Horowitz - as he shares the “Indicators the Disciplined Investor is Watching.”

This week’s edition is entitled, “Up to Start and Down to End” and features has standard quick charts on volume, internals, and a few of the alternate markets he’s keeping in focus this week.

This week, Andrew writes:

“Many of the indicators we watch have been pointing toward a break higher for markets along with commodities. There have been a few that were stuck in neutral while others were flashing BUY.”

“There are just too many indications that the latest move is a gasp with little volume support. Watch closely for of the signs that sell-offs are accompanied with strong volume trends, a sign that institutions are unloading shares.”

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Today showed another example of the theme I’ve been highlighting - literally - on the blog, showing multi-day rallies in the S&P 500.  Today confirms that we are in yet another ‘highlighted zone’ as has been the cycle of the past.

Let’s take a look at these regions, the present chart, and what to expect going forward.

First, I’m using two new tools that I don’t often show on the blog, and that’s because they are giving us hidden bullish strength signals.

The first is the “Accumulation/Distribution” volume-based indicator, and then the OBV or “On-Balance Volume” (also a volume-based indicator).

Without delving too deeply on these, I wanted to show that both of these indicators are making new highs above their early January 2010 peak while the price of the S&P 500 Index is not - that is a ‘hidden’ sign of strength that forecasts higher prices… like those we are seeing now.  It suggests that price could continue to test if not rise above the 2010 peak of 1,150.

With that ‘futuristic’ comment said, let’s look back at the highlighted regions which represent “short-squeezes” and multi-day rallies (without stopping) that have often triggered after a bearish signal (such as a break of a moving average) occurred.

See the following posts for more insights into these highlighted regions:

The 12 Failed Sell Signals on the S&P 500

“Recent Bull Traps and Sell-offs in the S&P 500?

“Recent Failed Sell Signals and Short Squeezes in the SPY

If History Repeats, Will it Mean New Highs for S&P 500?

The following posts are excellent examples of how to take current market “character” and forecast the potential future:

“New S&P 500 Highs Forecast by Fifth Sprung Bear Trap”

“Could S&P 500 be Building Yet Another Power Move?”

There have now been six examples prior to the current move that have unfolded almost identically - with anywhere from four to nine straight days of advances in the broader market, despite any bearish commentary or signals.

The current situation places that number at seven, as seen in the highlighted regions above.

What is the implication?

This is the reality of the current market in which we trade, which has a hidden (although it’s now blatantly obvious) bullish undercurrent/bias despite whatever the bears/sellers throw at it.

And in fact, the rallies are perpetuated in part by the short-covering (’popped stops’) of the bears.

Take some time to study these examples and use the knowledge to your advantage as long as history continues to repeat itself.

Corey Rosenbloom, CMT
Afraid to Trade.com

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I wanted to follow-up and highlight an interesting point in the recent price rally in Google (GOOG) - specifically with regard to the price bounce off the key ‘last-support’ level I previously mentioned.

It’s an interesting lesson that’s worth repeating - here’s the chart:

I had mentioned previously that the $520 level was the confirmation point in the otherwise ominous signs, including a bear flag short-sell entry (red arrow at $545).

Aggressive (risk-seeking) traders would go ahead and short at the 20 EMA to play for a new low yet to come, while conservative (risk-avoidant) traders would need to see a confirmed break under $520, shattering prior price support, as their entry point short.

I think this shows a great example of how important it is to monitor open positions and also - for some traders - to wait for confirmation before putting on a position.

The $520 level formed a simple boundary between expecting a potential support bounce (it happened) or confirming that odds favored downside action and targets.

As was the case here, Google formed two doji candles at the $520 level - the critical line in the sand - and rallied the last four trading sessions as aggressive bears covered positions in a mini-short squeeze rally this week (on higher volume!).

This serves as a testament that highlights the importance of simple technical levels - such as prior price support zones - as being key to interpreting the potential of the next swing in price.

It’s back to the Mark Douglas style of thinking - “Find a price/line that price either has to break through or bounce off of, creating opportunity depending on what happens at that level.”

If you were short from the $545 level, the two doji candles and the price break above the second doji on February 26th was a sign to take profits and perhaps stand aside to see how far a bounce could go.

A break under $520 would have been a trigger both to exit any long/buy positions (playing specifically for a bounce) or to put on new short-sale positions.

That’s exactly why we seek to find “Lines in the Sand” on our charts - they’re important levels that distinguish between bull and bear; buy and sell.

Google here reminds us that you don’t have to use complex charting skills to find these areas - simple prior price support or resistance levels work just fine.

Corey Rosenbloom, CMT
Afraid to Trade.com

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Yet again, we’re seeing a situation where we have a multi-day decline in the three-key market internals when compared with the price of the S&P 500 or SPY ETF.

That sets up a major non-confirmation and increases that odds that we’ll see a price reversal/retracement to test lower levels, barring any unforeseen bullish news here.

We’re seeing the 5-min SPY (or SPX or @ES) chart when compared with Breadth, TICK, and Volume Differential.

For more information on these ‘internals,’ see prior posts:

“March 1 Mid-Day Check on Market Internals”

“Odds Favor Correction by Looking at Market Internals” (Feb 22)

In fact, we’re in the same boat as we were back when I wrote the February 22nd “Odds Favor Correction” post, so take a look at that and you can see the downside resolution that came next.

As a reminder, here’s what happened last time (an update from the Feb. 22 post):

Remember, divergences warn of likely reversals/retracements, but never guarantee them.

The situation is best to take profits if long, hold neutral if your are a risk-averse trader, or consider shorting to profit from any potential downside action if you are a more aggressive trader.

Notice the trendline violations I’ve drawn.  While we could get a bounce or pop off the $112.00 level (looks that way) which is a ’round number’ support and prior swing low from yesterday, odds would shift dramatically to favor downside action if sellers took price under $112.00, so watch that level very closely.

Remember that divergences are like a rubber band that has been stretched, and sometimes when the rubber band - or a market - snaps back, the resolution can be violent, so be prepared in the event history repeats.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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