Buyers continue to reign on Wall Street. Large-cap indices across the board tagged new all-time highs last week. But what’s particularly interesting heading into the new week is the mega-breakout looming in small-caps. The Russell 2000 Index and its accompanying ETF — the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) — are poised to play some catch-up.
Since screaming higher following the election, IWM has been in a two-month holding pattern. Let’s call it a high base, and a tight one at that. For all its shaking and baking, the IWM ETF has remained stuck in a 3.6% range between $133.50 and $138.50. With Friday’s pop, small-caps are now testing the top-end of the range.
And since the rest of the broad market indices have already soared to new heights, I see little reason why the Russell 2000 can’t follow suit.
One of the reasons why breakout patterns appeal to the chart-watching class is the ease with which trades can be built around them. A common trigger is to enter bullish trades once the stock finally succeeds in breaking above resistance. Such a victory is telling. It signals that buyers have finally mustered the strength to breach a ceiling that was previously unbreachable.
That type of force often results in multiple days of follow-through until the buying binge eventually exhausts itself.
For IWM, the level to watch going into the new week is $138.82. Although Friday’s rally rose above a few minor resistance levels, $138.82 remains the all-time high for the fund.
This price needs to broken for the bullish party to begin in earnest.
Embrace Small-Caps for Big Profits
With implied volatility circling the drain, long option trades remain a cheap way to grab exposure to IWM. Buy the April $138/$143 bull call spread for around $2.25. The $5-wide vertical consists of buying the $138 call while selling the $143 call. The initial cost of $2.25 represents the max risk and will be forfeited if IWM sits below $138 at expiration.
To minimize the damage, you could consider exiting if IWM falls below the lower end of its range at $134. A decline below that threshold will invalidate any breakout attempt.
On the profit side, the IWM call vertical spread offers $2.75 of potential reward that you will capture if the ETF can rise above $143 by expiration.
As of this writing, Tyler Craig owned bullish positions on IWM.