Russell 2000 Gears Up For A Move

08/03/06 07:41:20 AM

by Arthur Hill

The Russell 2000 remains in a tight consolidation, and the impending break could have far-reaching consequences.

Security: $RUT
Position: Hold

First, let's look at the medium-term chart that extends back to April (Figure 1). The index peaked in May and declined sharply into mid-June. A consolidation then took over and the index established support at 670 with the June and July lows.

This is no ordinary consolidation. It looks like a head & shoulders pattern of the continuation variety. The left shoulder formed in late June, the head in early July, and the right shoulder in late July. A move below neckline support at 670 would signal a continuation lower and project a move to around 610. The length of the pattern (~60) is subtracted from the neckline break (~670) for a target.

FIGURE 1: RUSSELL 2000. The Russell 2000 index peaked in May and dropped into mid-June. A consolidation arrived at that point.

Graphic provided by: MetaStock.

To add a time dimension to this target, I drew a falling price channel based on the May–July trendline. The lower trendline of this channel extends to around 610 in late August, and this looks like a reasonable time frame.

FIGURE 2: RUSSELL 2000. In this short-term chart, we can see that the index formed a flag over the past week.

Graphic provided by: MetaStock.

The head & shoulders covers the medium-term time frame, and we might be able to get a jump on the break by looking at a short-term chart. Figure 2 shows that the Russell 2000 formed a flag over the last seven days. The index has traded between 685 and 705 since July 25, and a break from this range will offer an earlier directional signal. A break above 685 would call for a move higher, while a break below 685 would signal a move lower. Such a break would increase the chances of a neckline break at 670.

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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