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STOCHASTIC OSCILL


Russell 2000 Gets Cold Feet

05/31/07 08:31:08 AM
by Arthur Hill

The Russell 2000 broke consolidation resistance, but immediately pulled back, and now, waning momentum points to a bull trap.

Security:   $RUT
Position:   Hold

On the daily chart (Figure 1), the Russell 2000 advanced from mid-March to mid-April and then consolidated for five to six weeks. The index established resistance at 835 and support at 810 (magenta lines). While the Standard & Poor's 500 moved to new highs in May, the Russell 2000 kept turning back around 835. That seemed to change with the breakout and close above 840 (gray oval). The Russell 2000 looked poised to play catch-up but fell back over the last two days, and this is now looking like a bull trap or failed breakout.

The breakout just didn't have the juice, or momentum, to hold, and this was evident with the negative divergence in the stochastic oscillator. The indicator peaked in early April and formed lower highs over the last six to seven weeks. The index managed a higher high above 840 recently, but the stochastic oscillator did not confirm and remains well below its prior high. The divergence did not mean much until the indicator dipped below 50, its lowest level since March 22. The move below 50 is significant because 50 represents the midpoint for this oscillator. The cup is half empty when the indicator is below 50 and half full when the indicator is above 50.

FIGURE 1: RUSSELL 2000, DAILY. $RUT advanced from mid-March to mid-April and then consolidated for five to six weeks.
Graphic provided by: MetaStock.
 
Despite this failed breakout, the overall uptrend has yet to reverse. The index established support with two bounces around 810 in May, and this level marks key support. In addition, there are three fan lines extending up from the mid-March low. The index broke the first two and remains above the third. A move below this third fan line and the May low would reverse the medium-term uptrend and I would then expect a corrective period or extended decline to make sure.



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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