The Russell 2000 Index is going to show us the true direction next week. I find it very interesting how we closed the week today. Low volume, very narrow range, and no real clue about the markets intentions going into next week.
I suspect that we will finally start to see some real volume again next week as well as some real direction. This whole week was for the most part without direction and I believe a simple pause in the trend. The previous trend that got us up to this point was a three day straight line move.
What I see right now in the Russell 2000 Index is a pennant formation formed after the previous straight line move. In my experience it is quite rare to see this type of pattern form in any major stock index. The presumption is that the length of the previous straight line move should be repeated on a follow through move topside.
The top of the trading range on the Russell 2000 seems to match quite nicely with the possible measured move. A move back up to 660 to 670 range also is consistent with BestOnlineTrades earlier prediction on August 30th, 2010 that price would move back to the top of the range after hitting the recent lows.
Part of the premise for prices moving back to the top of the range has to do with the simple fact that this is actually what price tends to do as a rule. If price is unable to take out the previous lows, it will turn around and try to take out the previous highs. Think of price as if it is a caged animal. It it cannot get out of one side of the cage it will go to the other side and try. Wash, rinse and repeat, again and again, until it eventually breaks through.
There was no reason to go short today. In yesterday’s post I pointed out that I would go short if an only if we get and stay below 1100. This did not happen at all today.
The pennant in the Russell 2000 can still fail (as all technical analysis patterns sometimes do) . We will not know the direction until Monday morning of next week. I do not see any potential blockbuster economic reports due for Monday. Retail sales do come out on Tuesday so perhaps that would be the catalyst if it is a bullish reading.
So the bottom line of my take for Monday is that we see bullish topside follow through at the latest by Tuesday morning. However, if we gap down below that pennant on Monday I will have to obviously reconsider my stance.
Lastly I should say that I find it quite interesting the way the market is coiled up right before September 11. September in general for the stock market is not well known for being a great up month. IF the market can manage to evolve northward from this pennant and stay at the top of the resistance range for most of September it would be quite the significant statistic in my opinion and speak quite well about future market action into the end of the year in my opinion. . .