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STOCHASTIC OSCILL


A Bear Trap For The Russell 2000

03/08/07 03:09:53 PM
by Arthur Hill

The Russell 2000 broke support on Monday but quickly sprang back to lay the foundations of a bear trap.

Security:   $RUT
Position:   Accumulate

The Russell 2000 established support at 770 with reaction lows in late November 2006 and early January 2007. With these lows, a large consolidation formed and the index broke consolidation resistance at 800 with a big surge in February. This sharp advance further reinforced 770 as a valid support level, but these gains were wiped out with a sharp decline over the last two weeks. The index broke below key support at 770 on Monday and things were looking pretty bleak after this close. See Figure 1.

FIGURE 1: RUT, DAILY. The Russell 2000 established support at 770 with reaction lows in late November 2006 and in early January 2007.
Graphic provided by: TC2000.com.
Graphic provided by: Telechart 2007.
 
Technical analysts often apply filters to distinguish false moves from the real McCoy. The support break at 770 was only one day old, and this could have been caused by some excess volatility, a little noise, or a simple overshoot. A typical time filter is three days and this can help reduce bear traps or whipsaws. The downside, of course, is that the signal will come a few days later and this will affect the entry point. The index did indeed close below support at 770, but the ability to immediately recover shows resilience and makes this a bear trap. Moreover, this whipsaw once again reinforces support at 770 and I will continue to watch this area for signs of a breakdown -- with a time filter, of course.

What now for the Russell 2000? The bear trap keeps support at 770 alive and this means the overall uptrend is not finished just yet. The stochastic oscillator dipped below 20 last week and remains below 20. This shows an index that is both oversold and still weak. I would wait for the stochastic oscillator to turn up and break above 20 before calling for an oversold bounce.



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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Date: 03/09/07Rank: 4Comment: 
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