Market Crosscurrents: Is the Russell 2000 (RUT) intermediate chart indicating more market upside?

A lot of traders, including Christian at PSA, rely primarily on daily charts for determining market direction and overbought and oversold conditions.

However, I try and incorporate weekly and monthly charts into my analysis in order to look for hidden trends that are longer term.

I like to use the RUT as a leading indicator for the S&P and DOW as Small Caps generally lead the overall markets into, and out of, recession.

Now.. looking at the daily RUT, it would appear to be overbought. But we've seen in previous cases where that Stochastic will hover above 80 for some time before finally succumbing to gravity and returning to oversold conditions.

NOW.. if we look at the WEEKLY RUT, we'll see that it bounced off of the 20 level on it's Stochastic and reversed upward.

This is also a chart that distinctly indicates the value of Bollinger Bands in determining trading ranges for equities. We can see that the RUT has consistently remained within it's weekly Bollinger Band envelopes (minus the May 6th "Flash Crash"). This COULD give the RUT the potential of seeing 700 over the next few months before reversing off a WEEKLY overbought condition.

But let's look at the Monthly RUT chart to see if there are any confirmations that would support a further move to the upside.

As we can see, the monthly RUT chart is DRAMATICALLY OVERSOLD and looking to bounce off that 20 level on it's Stochastic, where it has bounced twice previously at it's previous March, 2009 low. Furthermore, we can see that the MACD has been struggling to go positive and it's histogram appears to be leveling out, rather than descending. So this month will be critical to determine the future direction of that histogram and whether the MACD returns to negative, or continues it's positive path.

What's LACKING in that monthly chart is a "hammer" on the candlesticks, unless one counts the hammer that was put in back in April. But I'm not sure that hammer is still valid given what has occurred since the "Flash Crash".

This is NOT a recommendation to go long the markets, as I still see the fundamentals deteriorating, which could undermine the technical analysis. But it does represent something that should be considered if the next pull back on the daily chart is at a higher level than previously, or results in a strong hammer bounce on the daily.

Scrutinizer