Russell 2000 Forms Flag Near Resistance

04/01/03 02:54:37 PM

by Arthur Hill

After a sharp advance from 343 to 376 (9.6% in two weeks), the Russell 2000 Index has become overextended and ripe for a pullback or consolidation.

Security: Russell 2000
Position: N/A

On the Russell 2000 chart, three features highlighted resistance between 375 and 380. First, 378 marks a 62% retracement of the prior decline (400 to 343). Second, support turned resistance from the late December low extends to 380. And third, the trendline extending down from 414 (early December) marks resistance around 377. With so much overhead resistance, the odds of breaking through on the first attempt were not good.

On the 60-minute chart, 15-period RSI moved above 70 (overbought) and formed a negative divergence (blue arrow). This foreshadowed a pullback and the index traced out a falling flag last week. Flags typically slope in the opposite direction as the prior move. Hence, bullish flags fall (downward slope) to signal a small correction or consolidation and bearish flags rise (upward slope) to signal a small reaction rally or consolidation.

Figure 1: 60-minute chart for the Russell 2000 Index.

Graphic provided by: MetaStock.

With a weak open on Monday (31 March), the Russell 2000 is testing support from the lower trendline of the falling flag. As long as the upper trendline holds, a breakout is premature and it is wise to respect the bears. A move above 371 on good volume would be bullish and signal a continuation higher, projecting further strength to around 395 (376 - 343 = 33, 362 + 33 = 395) -- provided, of course, that the low at 362 holds and there is a breakout.

Figure 2: Daily chart for the Russell 2000 index

As the chart now stands, the index is poised to break resistance turned support at 365 and this would open the door to a correction of the prior advance (343 to 376). A 62% retracement of this advance would carry back to around 355 and a 50% retracement to around 359. As long as the flag falls and RSI remains below 50, the short-term trend and momentum favor the bears.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Russell 2000 Forms Flag Near Resistance

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