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CONSOLID FORMATION


The Russell 2000 Breakout

02/08/07 08:34:53 AM
by Arthur Hill

The Russell 2000 broke consolidation resistance this month and the breakout signals a continuation of the ongoing uptrend.

Security:   $RUT
Position:   N/A

The Russell 2000 advanced from August to November and then started a 10-week consolidation (Figure 1). The index found support around 770 and resistance around 800 to mark the range. There were at least five attempts to break above 800 and all failed — until now. The index gained traction in late January and early February to forge a consolidation breakout. This move signals a continuation of the August–November advance, and further upside should be expected in the coming weeks. Think of the consolidation as a rest after the August–November advance. The trading range gave the index time to reload its batteries, and the breakout has revived the bulls.

FIGURE 1: RUSSELL 2000. The Russell 2000 advanced from August to November 2006 and then began a 10-week consolidation.
Graphic provided by: MetaStock.
 
The consolidation marks a resistance zone from late November 2006 to late January 2007, and this resistance zone now turns into a support zone. The breakout at 800 marks the top of the new support zone and the first place to expect support. A strong index should hold its breakout, and a move back below 800 would be negative. The bottom of the support zone marks key support and this holds the key to the overall uptrend. Even though failure to hold at 800 would be negative, it would take a break below 770 to turn outright bearish.

FIGURE 2: RUSSELL 2000, WEEKLY. The upper trendline extends up to around 910 by June 30, and this is the midyear target for the index — provided the breakout and key support at 770 hold.
Graphic provided by: MetaStock.
 
Turning to the weekly chart (Figure 2), I can make an upside forecast with a linear regression channel. The red line is the linear regression of closing prices from August 13, 2006, to February 7, 2007. The blue lines are parallel and these mark support and resistance. They also establish the rate of ascent for the current advance. The upper trendline extends up to around 910 by June 30 and this is the midyear target for the Russell 2000 — provided, of course, that the breakout and key support at 770 hold.



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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