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Russell 2000 Nearing Critical Inflection Point

09/18/09 08:31:14 AM
by Donald W. Pendergast, Jr.

Up nearly 80% in six months, the Russell 2000 index may be ready to take a break, possibly correcting, some time within the next one to three weeks.

Security:   .RUT, IWM
Position:   N/A

It's not often that a major stock index piles on gains of 80% in a mere six months; usually, a rebound of such magnitude will be seen only in an industry group or its component stocks. Does the R2K still have room to run, and, if so, for how much longer before a significant correction?

FIGURE 1: RUT, MONTHLY. With an initial time/price confluence turning point (calculated in early August 2009) projected for September 21, 2009, near the 623 level, the price action of the next few sessions should prove or disprove the validity of the assumptions used to make that projection.
Graphic provided by: MetaStock.
Graphic provided by: Various WB EOD indicators from ProfitTrader.
Regular readers of Advantage (TCA) may recall an article that I published on August 7, 2008, entitled, "Broad Markets Still Looking Healthy." In the article, I described a method to project time/price confluence areas for the weekly price cycle that most frequently governs the Russell 2000. Using the time and amplitude of the first cycle run higher from the early March low, I took the absolute number of points gained (+193) and the number of weeks (13) that it took to achieve those gains before the cycle topped out, multiplied each figure by significant Fibonacci ratios (the 62% and 79% ratios) and added them to the cycle low price achieved on July 10, 2009. This simple formula determined that the index was likely to make a second weekly cycle high sometime between September 4 and September 21, 2009. The formula also determined that the R2K, if it exceeded a price of 593, would most likely move up toward the 625 area. So how has this mathematical mess played out so far, anyway? Well, the 593 level is long gone, as the index has actually made it almost to 622, a mere three points shy of the initial calculation. We're also only a few days from the September 21, 2009, cycle top time estimate for this current weekly cycle move.

In the monthly R2K chart seen in Figure 1, check out the detrend oscillator (top panel) and note how high it is in relation to other significant peaks; it is already higher than the last monthly extreme reached during July 2003 (in the wake of the similarly powerful March 2003 reversal in all of the broad US markets) and is a few points shy of its all-time high reading, achieved in March 2000, just before the NASDAQ and R2K went into multiyear tailspins. Given that the market is nominally overbought, at least according to the monthly detrend oscillator, the previously mentioned weekly cycle time/price top-out projections take on an especially meaningful glow, especially since the R2K is also just a few points shy of its 50-month exponential moving average (EMA; blue line on chart).

The glaring exception to all that's been mentioned before is this -- the monthly NASDAQ internal strength indicator (red indicator, bottom panel), which measures the rate of change in the index, the advance/decline ratio, the up/down volume ratio, and the ratio of new highs to new lows. This thing just keeps grinding higher and has actually reached its zero-line for the first "from below" zero-line crossover since June 2003, which was still very early in the last bull market, one that ran from 2003 to 2007.

Does all of this mean that the Russell 2000 index has to turn on a dime in the next week, never exceeding 623-625? By no means. However, given all of the confluences of price/time, detrended extremes, and resistance levels that are all coming into play at the same time, it might be wise to be more cautious about opening new long positions in the next few weeks. Existing long positions should be trailed more closely and/or sufficient profits taken as appropriate to your own needs. The next few weeks should be very interesting to watch as these time/price interactions play out in real time, with real money on the line.

The next weekly cycle low in this index isn't due until early to late November 2009, and with the quarterly price cycle still in a strong bullish phase, it might pay to keep your big deployments of cash on the sidelines until that weekly cycle low is confirmed. Stay tuned for more developments as they unfold.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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