The small-cap Russell 2000 index — as represented by the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) — has rallied a little over 10% off the late-June reaction lows. All the while, the IWM has overcome plenty of near-term technical hurdles.
Over the past eight trading sessions, however, the IWM ETF has meandered sideways. A break of the Russell 2000 in either direction looks increasingly imminent.
Across nearly 20 years as a trader and investor, I have come to respect the importance of always seeing both sides in a trade. As such, while the latest melt-up in U.S. stocks makes little fundamental sense, I have to respect the risk-on move in a world where low bond yields keep making stocks look relatively attractive.
Let’s look at a pair of charts for some perspective on the small-cap Russell 2000 and the IWM ETF.
IWM ETF Charts
On the multiyear chart, we see that just like its larger cap sibling the S&P 500, the Russell 2000 has spent the majority of the time of the past couple of years treading water. Unlike the S&P 500, however, the IWM has yet to break to fresh all-time highs.
The below chart shows weekly increments and shows that in early 2016, the IWM ETF broke below its 2009 support line (red bubble), which also coincided with the red 200-week simple moving average. If one were to make a monthly chart, however, it would be obvious that the January/February 2016 selloff held the 2009 uptrend.
As such, through a trend-following lens, the Russell 2000 continues to trend higher despite the volatile January/February period.
Zooming in on the daily chart, we see that the late June reaction lows had the IWM ETF hold a confluence area of support, which at the time was made up of horizontal support from the April and May lows, as well as the 100- and 200-day simple moving averages.
The latest rally had the IWM ETF rally right into horizontal resistance (red dotted line), and the fund has been consolidating there over the past few trading sessions. Technical analysts will be quick to note that this consolidation time has taken place in a narrow range and is forming a wedge-like pattern.
Active traders and investors could now look to play a breakout in either direction for a trade. A solid daily close above the $120.60-$121 area could see a next move higher toward $124. On the other hand, a solid daily close below $118.70-$118.50 may see a mean-reversion move lower toward $115-$114.50.
Either way, active investors and traders at this point would be wise to wait for a breakout in either direction before taking a next stab at the IWM.
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