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Russell 2000 Retesting Support

11/24/10 01:47:14 PM
by Chaitali Mohile

Russell 2000 Small Cap Index is undergoing a relief rally. Will this rally sustain its momentum?

Security:   $RUT
Position:   N/A

A sharp rally of the Russell 2000 Small Cap Index ($RUT) consolidated at 710 levels with lower support near 690. The advance rally formed a short-term bullish flag & pennant formation in Figure 1. The consolidation period of $RUT was very short, which later breached upward, resuming the previous upward move. However, the weak uptrend indicated by the average directional index (ADX) (14) terminated the fresh breakout rally. The index hardly surged to 738 levels and began drifting down. The moving average convergence/divergence (MACD) (12,26,9) formed a lower high as price hit a new peak at 738 levels. Therefore, the combnation of a negative divergence in the MACD (12,26,9), the shaky full stochastic (14,3,3) and the weakening uptrend confirmed the failure of the bullish breakout move.

Graphic provided by:
Since the bullish flag & pennant formation was very short term, the breakout failure cannot be considered to be a major trend reversal but would definitely lead to a weakness in the rally. The index retraced below the initial support of the upper consolidation and rested with the next support at 700 levels. Apart from the weak trend, the other two oscillators were holding their bullishness, which validates the pullback from 700 levels. The upper range resistance has converted to support. In such a scenario, the index is likely to reach the previous high resistance of 738 levels.

Graphic provided by:
If you look at the weekly time frame in Figure 2, you will see that $RUT had formed a new high at 745 levels in April 2010. Later, the index lost about 150 points, plunging below the 200-day and 50-day moving average (MA) support levels. The relief rally from 588 levels marked a marginally lower high at 739 levels. The difference between the earlier and current high is hardly five points; therefore, we can consider it as a double-top formation. The double top is a bearish reversal formation that begins a fresh bearish rally, reversing the existing uptrend. After hitting another high at 739 levels, $RUT has retraced marginally. The double-top formation would add bearish force to the index. The lower high of the MACD (12,26,9) shows weakness in the existing pullback rally. The stochastic oscillator is highly overbought in Figure 2 and the ADX (14) is showing a weak uptrend; hence, it is likely that $RUT would be reluctant to breach the previous high resistance of 739 levels. The two MAs have converged, developing robust bullish support at 650 levels.

Thus, $RUT would face strong resistance above 739 levels and witness high volatility in the higher areas.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
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