Russell 2000 Weekly Cycle Target Hit

09/24/09 09:27:49 AM

by Donald W. Pendergast, Jr.

Market predictions are risky business, but when sound logic, based on repetitive patterns, is used to make a price target calculation, the results can be surprising.

Security: .RUT, IWM
Position: N/A

Over the last few weeks I devoted a couple of articles to the projected price targets for the Russell 2000 index; my calculations, based on Fibonacci projections added to the point value of the March-June weekly swing move in the index (see my August 6, 2009, TCA article "Broad Markets Still Looking Healthy") anticipated that the R2K's upper target (based on an anticipated weekly cycle top) would be about 625.45 and that it should arrive on or about September 21, 2009.

Well, I almost choked on my coffee when I checked the Russell's daily OHLC (open, high, low, close) figures; today's high (which is the highest point ever reached by the index since the start of the powerful uptrending move that commenced in March 2009) came in at 625.31, only two days after the projected turning point. If indeed this is the cycle top, the projected turning price came within 0.14 of an index point of calling it exactly. Of course, perhaps today's selloff is just a minor setback on the road to higher prices, but even if it is, we can put the same Fibonacci formula to work to come up with a new target.

Let's now look at a daily graph of the R2K and see what other goodies we can uncover as we seek to discern the near-term trajectory of America's most-followed small-cap index. See Figure 1.

FIGURE 1: RUT, DAILY. With weekly and daily cycle highs likely in place on the R2K, it may be prudent to wait until this daily pullback plays out, perhaps near 565-575 at or around October 10, 2009. This time/price projection is based on a 20-bar daily cycle length and all key Fibonacci support levels.

Graphic provided by: MetaStock.

Graphic provided by: WB Detrend EOD from ProfitTrader for MetaStock.

This deceptively simple chart layout actually helps confirm the validity of the projected R2K time/price turning point that was calculated back in early August 2009. The calculation concluded that the R2K would run to 625.42 on or about September 21, 2009, and, while today's sharp intraday reversal in the R2K (it reversed a mere 0.14 of a point from the projected high) appears to be the initial evidence necessary to prove the time/price calculation was right on, it still behooves us to check other essentials like the internal strength of a related index (the Nasdaq Composite), the swing line characteristics of the daily R2K and the state of the detrend oscillator, which is terrific when used to measure extreme overbought/oversold situations, price-momentum divergence and cycle tops/bottoms.

So, let's start with the internal strength (top of the chart); yes, it's still very bullish but appears to be rolling over, suggestive of a daily cycle high. The detrend has already confirmed both a cycle high and price-momentum divergence, while the lower Gann swing line (blue lines on chart) are just barely acting as support in the wake of today's reversal. The Gann swing lines are based on a simple concept -- any directional movement that causes a stock (commodity, exchange traded fund, whatever) to close above the three-period simple moving average of the prior three daily highs is viewed as a bullish development, particularly if the stock/commodity in question is also in a confirmed uptrend (as determined by Gann swing geometry). (In case you've never heard of Gann swing lines, you may want to look for an article in the October 1999 STOCKS & COMMODITIES for more information on the subject.)

The converse of the above is true on a bearish drop below the lower Gann swing line, which is what may be about to happen on the daily R2K chart. The lines also work very well as a simple channel breakout system all on their own; you just use the opposing line as your initial stop/trailing stop and let the trade rip, all else being equal. Now that we've determined that the most likely move for the R2K is likely to be down, let's see if we can't establish a few projected targets on the downside, just in case this analysis is correct.

Doing some basic cycle calculations, the Russell 2000 index isn't likely to make a meaningful daily cycle low until approximately October 9-12, 2009. That's about two and a half weeks from now, and given that both weekly and daily cycle tops are likely in, extreme caution should be used before initiating any long positions before then. Even with that, be aware that the index isn't even projected to make a weekly cycle low until sometime in November, so it might be a good time to scale back on dollar allocations or even just stay in cash for the next three to six weeks.

Here are some possible Fibonacci support zones to watch for as the anticipated early October daily swing low approaches:

1st support: 592-598
2nd support: 583-580-578
3rd support: 572-568-565

Just below those levels are two critical chart support levels, both of which are major swing lows, one at 552.27 and the other near it at 546.96. If either of those two levels are taken out, a much more severe corrective phase may commence. Cycle analysis isn't perfect, but, when combined with Fibonacci extension/retracement numbers, it can be a very useful market discipline that can help keep you on the right side of the markets.

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.

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Russell 2000 Weekly Cycle Target Hit

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