Last week was a treacherous week indeed, with stock prices falling universally. That said, one of the "weakest indices" was related to the US small cap arena, and specifically to the Russell 2000 Index ($RUT). In the past, RUT led the market higher, but that changed last year as a bottom was forged against the S&P 500; however, we now see sharp absolute weakness has caused RUT to breakdown below its 85-week exponential moving average. This moving average during the bull market from 2002 has provided an excellent "buying point" – especially given when the 14-week stochastic has fallen below 50. Unfortunately, that isn't the case at present, as Friday's weakness caused prices to break through this important moving average, which to us suggests a "bear market" in small caps is now confirmed, with further downside price action likely in the months ahead.

As a result, a reasonable "first target" is 670, which is another -10% lower from current levels. But in the fullness of time, we would expect the decline to find major support at the 50%-62% retracement of the entire bull market, which on a worst case basis would be -30% from current levels. Moreover, if the decline looks anything like the April-to-October 2002 decline, then we could very well obtain our "worst case scenario" by the end of this year.

Chip Anderson
About the author: is the founder and president of He founded the company after working as a Windows developer and corporate consultant at Microsoft from 1987 to 1997. Since 1999, Chip has guided the growth and development of into a trusted financial enterprise and highly-valued resource in the industry. In this blog, Chip shares his tips and tricks on how to maximize the tools and resources available at, and provides updates about new features or additions to the site. Learn More
Subscribe to ChartWatchers to be notified whenever a new post is added to this blog!
comments powered by Disqus