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Small-cap stocks joined the party along with the Dow [INDU], S&P 500 (NYSEARCA:IVV) and Nasdaq (QQQQ) to record highs (albeit a day late), proving that Friday the 13th wasn’t so scary after all. For now, the trend remains toward higher prices. If those caught on the short side of this market are also tight on equity, then the move up tends to be exacerbated as they pay through the nose to unload losing trades. It’s worth noting that last week’s charge to record highs included a gap higher open on Thursday – as I’ve said in the past, trading in the direction of a morning gap that is not quickly filled often becomes a big short-term winning trade.

Looking ahead to this week, the big issue right now is to make sure that the Russell 2000 (NYSEARCA:IWM) does NOT set up a double top on the recent highs. Although the index made a new historic peak on Friday, it was only by a few “handles” over the previous highs in late May/early June, and the market needs to avoid turning south off that zone once again to prove that seller resolve in the 850-855 zone is not greater than buyer exuberance.

As you can see on the below charts, there is a minor divergence between price and momentum peaks on this latest push higher. Similar divergent behavior in recent months resulted in short-term declines, but was not a long-lasting warning signal. Of greater concern is that weekly charts sport a similar divergence, and on those charts, this kind of divergence can be a topping signal.

Russell 2000

So, how do we approach the market given current chart action? With bullish caution, that’s how! If you are holding long-term long positions at a big profit, then there is still no decisive reversal topping pattern to trigger a profit-taking strategy. If you are short, then you’ll be praying for a double top to emerge this week amid a rush of inflation data and “Fed-speak” (see economic calendar below).

A few weeks ago, we started keeping track of the ownership structure in derivatives. According to the latest batch of data from the U.S. Commodity Futures Trading Commission, large commercial accounts (we enviously refer to them as “deep pocket” traders) continue to hold an unusual long position in benchmark S&P 500 futures, which is a supportive sign for the market at these lofty levels. In addition, those same deep pocket accounts are massively long the Russell 2000 contract, which is a benefit to small-stock index instruments. Commercials have however, been reducing longs in the Nasdaq and are actually net-short that index.

Despite the abundance of good tidings for the stock market last week, it is very important for the Russell 2000 to break out to more impressive new highs soon to avert any powerful double top formation, and to extend buying momentum so that the divergence we noted above does not become a topping indicator. On the attached weekly chart, you can see that we have been in something of a sideways congestion zone near these highs for several weeks between 820 and 855; a convincing upward thrust would carry a short-term goal of 35 handles (the measure of the congestion zone) to a target of 890. Conversely, a slide back below 820 would target a move down to 785.

russell 2000 candlestick

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. 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 recent 15-handle testing zones
- 856.48 record intraday high set July 13
> 855.77 July 13 close; record high daily and weekly close
- 851.00 initial short-term support off the previous late May/June highs
- 842.78 20-day moving average
- 830.01 previous high from the February 2007 peak; key swing line of note
- 827.50 20-week moving average; nice trend support for bull run
- 821.28 May 24 low; support area on daily charts that was tested in mid-June
- 818.56 support zone on intraday charts
- 815.90 previous resistance zone; now support
- 807.69 May 1 “hammer” reversal low on daily charts
- 803.29 61.8% Fibonacci of the Feb-March collapse; also corresponds nicely with a series of highs in the Nov/Dec/Jan time frame
- 789.00 approximate Fibonacci retracement of Feb-May rally
- 784.62 key reversal peak from May 2006; now support
- 775.50 support zone on several occasions on daily charts
- 760.06 recent collapse move low; key approximate double bottom formation

In addition to the print-out 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.

Inflation data takes center stage on the numbers front this week, with PPI and CPI holding the biggest event risk potential. In addition, several manufacturing reports could swerve the market tone, as could the release of FOMC minutes on Thursday. Despite the importance of all those economic reports, the so-called “Humphrey-Hawkins” testimony by Federal Reserve Chairman Ben Bernanke on Wednesday and Thursday could end up stealing the volatility show. In addition to Bernanke’s testimony, several other key Federal Reserve officials will be on the appearance circuit this week, including Thomas M. Hoenig, president, Federal Reserve Bank of Kansas City, on Tuesday at 1300 ET, Michael H. Moskow, president of the Federal Reserve Bank of Chicago, on Thursday at 1230 ET, and William Poole, president of the Federal Reserve Bank of St. Louis, on Friday at 1030 ET.

The table below highlights calendar event risk for this week, with the emphasis on various economic reports. The 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 risk assessment

Source: Bullish - But Watchful - on the Russell 2000