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Is R2K Cycle Low in Place - Or Not?

02/19/10 08:52:12 AM
by Donald W. Pendergast, Jr.

Cyclical analysis of the broad stock indexes can be a useful and rewarding endeavor for the astute technician. Here's a look at the current weekly price cycle pattern in the Russell 2000.

Security:   RUT, TF, IWM
Position:   N/A

Price cycles in the financial markets may not be the hot topic at the office water cooler, the family dinner table, or on the golf course, but technicians who grasp the power of this essential technical tool may not be able to shut up once they experience the thrill of timing profitable trades based on skillful use of cyclical price studies. Not that cycle analysis will always guarantee a winning trade, but the frequency with which they can help keep you out of low-probability, high-risk trade setups is well worth the effort it takes to regularly analyze such cycles. In this article, we'll study the weekly chart of the Russell 2000 (RUT, TF, IWM) in an attempt to determine, as famed trader and speculator Edwin LeFevre (also known as Jesse Livermore) once referred to as "the line of least resistance" for this key small-cap stock index.

FIGURE 1: RUSSELL 2000, WEEKLY. With strong internal strength abiding within the broad US markets, the appearance of a CS Scientific long trend confirmation signal may indicate that the R2K is planning on a run to fresh post-crash highs.
Graphic provided by: MetaStock.
Graphic provided by: WB Detrend and CS Scientific Expert from MetaStock.
Figure 1, the weekly chart for the R2K, features a NASDAQ Composite internal strength indicator (which measures the rate of change, advance/decline ratio, up/down volume, and new high/new low readings for the entire NASDAQ market, combining them into a simple, easy-to-decipher indicator; a specific R2K internal strength indicator isn't available yet in MetaStock but hopefully will be added at some point). The indicator is rising and is well above its zero line too, a very positive sign that suggests that plenty of money is still flowing into the broad markets.

At the bottom of the chart is one of the best expert advisors available in MetaStock, the CS Scientific expert. Configured as a colored ribbon, this indicator does an excellent job of confirming strong, weak, and neutral market phases. It's not meant to be used as a timing tool per se, as it takes its time before issuing a change from neutral to strong (red to gray on the expert advisor ribbon), but it is very useful for those who want to time pullback entries in a lower time frame (in this case on a daily chart). It's hard to believe, but this is only the second time since July 2007 that this particular indicator has been in gray (long) mode, so the current strong rally off the 200-day exponential moving average (EMA) at key Fibonacci time and support areas might actually be destined to run higher than we might imagine.

The big deal here on the chart is, of course, the green ovals that identify the major weekly cycle lows in the R2K. Historically, this index averages about 15 to 18 weeks between weekly cycle lows; since the epic low of March 2009, the cycle lows have come in at 17, 17, and now 13 weeks, respectively. Cycles can and do expand, shrink, and may even seem to vanish during long periods of consolidation, but overall, this index is fairly reliable at 15 to 18 weeks between major weekly lows. The fact that this latest turn occurred only 13 weeks after the last one (November 2009) suggests that either the R2K is in a hurry to meet and/or exceed January's post-crash high of 649.15 or that the early 13-week cycle low is a phony, with the index now in the B up wave of a possible A-B-C corrective pattern that might actually take the R2K back down toward 580 (if not lower). If the latter scenario is the one destined to play out, expect a major weekly cycle low in three to six weeks. Conversely, if the current upswing continues, be aware that the area near 650.00 will undoubtedly offer considerable resistance.

For the time being, daily (or intraday) traders should be relatively safe in taking long swing trade entries in fundamentally healthy small-cap stocks for as long as that CS Scientific expert stays in the gray zone on the R2K weekly chart. So start sifting through your hot lists now and see what kind of small-cap stocks make the cut as you attempt to take advantage of the gift of a powerful weekly upswing in the US's premier small-cap stock index.

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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Date: 02/22/10Rank: 4Comment: 

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