Watch the Russell 2000

There's almost always an index that calls important tops and bottoms for the entire market. Usually the award goes to the S&P 500, and in particular the S&P futures. Not this time.

The Russell 2000 telegraphed last week's lows. It screamed "bottom" as it formed a triple bottom with its August lows.

On Oct. 12, I discussed how the Russell 2000 offered clues to the market's next move of significance. The picture-perfect filling (within pennies) of the July 20 gap in the Russell 2000 called the Oct. 11 market top. But it didn't just call the top in the Russell 2000, it called the top in the entire market.

Take a look at your charts. The S&P was making all-time highs that day, that hour, as the Russell 2000 filled its gap and topped out right there, then reversed to the downside.

Fast forward to last week, when the Russell 2000 was flirting with its lows for the year at the 736 level. Tuesday, Nov. 20, the RUT bottomed at 736.52. Then, after bouncing off that level, it narrowly held again on Wednesday, Nov. 21, with a lower low of 736.09, just 0.09 above the August lows.

Once the dust had settled, the result was a neat-looking triple bottom at the 736 level. The Russell 2000 could have spelled disaster for the market with a break of what was then a double bottom at 736, but it didn't. It held. And the market rallied sharply on Friday -- just as the Russell 2000 told us to expect.

That level is of singular importance now. It's the line in the sand for the Russell 2000, perhaps the entire market. If that level gives way, there's little support till we go all the way down to the Russell 2000's July 2006 lows at 668.58.

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At the time of publication, Schiller was long S&P, Dow, NDX, and Russell 2000 mutual funds, although holdings can change at any time.

Dr. Harry Schiller is a Registered Investment Advisor with the California Dept. of Corporations. He holds a Series 7 General Securities license as well as a Series 4 Options Principal license. He has been owner and editor of the Short Term Consensus Hotline since 1988. For more information, see www.harryschiller.com. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.