As global equity markets have seen more volatility in recent days, the correlation among stocks has also spiked. To me, this says we should have an increased focus on the indices as trading vehicles as opposed to single-name stocks.
The Russell 2000, as represented by the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), has flagged ominous signs in recent months, but could be a good ETF for active investors to trade in coming months. That’s because the IWM allows for a little leverage over the S&P 500 with price behavior that is equally sound through a technical lens.
Back on July 29, I offered up a trade idea that forecast a little bounce in the IWM ETF, followed by a steep multimonth decline. I highlighted both the relative and absolute weakness in the Russell 2000, and while the small bounce I saw fell a little short of my target, the bigger downside move I discussed has in the meantime reached its first price target at the $110 level.
Active investors that heeded the call of my charts could have at the very least avoided the recent pain selling (and may have even profited) if they played the IWM ETF to the downside when technical support snapped.
IWM ETF Charts
The multiyear chart of the IWM shows that as a result of the sharp and swift selling over the past four to five trading days, the ETF quickly br0ke below the 2012 support line and reached the bigger 2009 support line.
Momentum is increasingly looking oversold by most momentum measures, but because the technical damage done is more severe than, say, during the October 2014 correction, the IWM ETF likely will now see more volatility in coming months, and thus opportunity for active investors to buy extreme oversold readings and sell into or short into bounces that reach technical resistance levels.
On the daily chart, we see that while the IWM ETF early this year broke above the black horizontal line of resistance, it then began to trace out a big head-and-shoulders pattern that triggered lower once price broke back below the black horizontal and the 200-day moving average (red line).
The measured price target of this head-and-shoulders pattern has now been reached just as the MACD momentum oscillator is reaching oversold extremes it last saw at the October 2014 lows.
Given the gyrations in global equities, it is very possible that in the immediate term, the Russell 2000 has a little lower to test. However, it now looks very likely that the next bullish reversal day sets up a meaningful multiday/week oversold rally that sees the IWM ETF rally back toward the $116 area.
Active investors could look to buy the next bearish capitulation/bullish reversal day for a good oversold rally.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
