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Is R2K Closing Out 2010 At Yearly High?

12/01/10 08:56:33 AM
by Donald W. Pendergast, Jr.

The Russell 2000 is less than 20 points shy of exceeding the April 2010 high of 745.95. Does this key small-cap index have enough fuel left to close out 2010 at its highest price of the year?

Security:   RUT, TF, IWM, TNA
Position:   Buy

Any time that a stock, index, or futures market manages to retrace better than 75% of the losses of a devastating bear market collapse is a good time to evaluate the technical state of such a market. The Russell 2000 index (.RUT) achieved this noteworthy event by the end of April 2010, just before turning back south for a three-month corrective pullback to the sub-600 area.

After having risen so far in little more than a year (more than doubling in value) after making the major March 2009 low at 342.59, such a shakeout maneuver wasn't entirely unexpected, at least not by savvy traders. Right now, however, the index is once again at the key 75% level (a real biggie for Gann adherents) and also moving quickly toward the key Fibonacci retracement ratio of 78.6%, which also coincides with the April 2010 high of 745.95. Here's a quick look at what may prove to be the line of least resistance for this major US stock index -- at least through the end of this year. We'll use the monthly chart of the R2K as our reference point (Figure 1).

FIGURE 1: RUSSELL 2000, MONTHLY. Markets can reverse course when least expected, but with a very reliable year-end seasonal bias already in effect for the broad US markets, expect the selloffs to be mild and the upside to be strongly bullish for the next month or so. News of an extension of the Bush tax cuts could also provide some extra bullish fuel, too.
Graphic provided by: MetaStock.
Graphic provided by: WB Detrend RT EOD from ProfitTrader for MetaStock.
As the R2K pulled back down toward its 21-month exponential moving average (EMA) (red line on chart) in July 2010, it managed to bottom and then reverse right at the Fibonacci 38.2% retracement of the massive run from 342.59 to 745.95. That was one of the first indications that the rally up from the March 2009 low may have been only the first leg higher in a multistage rally, one perhaps destined to recover all of the R2K's losses since July 2007.

With November set to close out with yet another monthly gain and the broad markets also seemingly poised to take advantage of the highly bullish seasonal trend that typically sees the R2K make above-average gains for December, the big deal here is for traders to decide how to best position their portfolios for the expected rally. Since you probably already know that a strong close above the April high/Fibonacci 78.6% retracement will very likely spur a fresh round of buying activity, what might be the best way to play that kind of price action?

Here is a basic way to play this bullish market posture with IWM or with TFZ10:

1. IWM/TFZ10/TNA traders can initiate long positions on intraday pullbacks to key intraday support (trendlines, moving averages, and floor pivots) in the Russell 2000. The idea here is to catch a strong swing move for maybe five to 10 points at a clip before closing out the trade and waiting for further market setups to appear. With the market moving like steel toward the magnet of that April high at 745.95, and with the bullish seasonality in your favor, this could be one of the best short-term swing plays you're likely to see until next year. And the best part is that you may very well be able to locate two, three, or even four low-risk setups like this as December progresses. Just be sure to cut your losses at predetermined dollar values just in case the bullish scenario somehow goes haywire.

So keep some spare cash available in your stock and futures margin accounts and see if you can't put this potentially explosive bullish seasonality to work in your favor. Watch the price action carefully, should 745.95 be exceeded on a daily close; this could be the trigger that sets the R2K in motion toward the 800 area once again.

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: 12/07/10Rank: 5Comment: 

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