Russell 2000 Chart – Hitting Resistance

I charted the Russell 2000 index ($RUT) after the markets closed on Friday, July 31, 2009 when it finished the month at 556.71.

The big glaring line that looms large is the long trend line of higher highs that the $RUT has bounced against for the past two days.  I drew the beginning of that line nearly six months ago in early February.  The small cap index came close to it again in the first half of May and then touched it again in early June.  If history repeats itself, as it’s prone to do, we should get a pull back. 

Where we pull back to could be interesting.  The two trend lines I drew showing higher lows are going to converge soon.  That timing could work out to be a good line of support.  If the Russell 2000 pulls back that far, that’ll put it down near the low 500 range which is 7-8% lower than the current range.  That alone could be reason to buy as the downside risk should be fairly low at that point. 

I’m not suggesting shorting $RUT here, but do think you’ll be pushing your luck if you are buying in after the rally we’ve had. The thing about using trend lines of higher highs is that the prices can keep creeping up without breaking that line, slowly killing the shorts on the way up.  The Williams %R indicator at the bottom of my chart for both the 14 and 28 day periods shows momentum hasn’t given up yet.  That means we could keep seeing a small trading range with an upward bias for days (doubt weeks) to come.

I’ve been fighting it, but am slowly turning more bullish based on some of the leading indicators starting to hint the worst is over.  If that’s the case, buying in on the next dip could be great timing.  I don’t think I’m alone in this plan, so when (not if) we get the next dip expect to charge out of it with more momentum this time perhaps than even July saw.