The divergence between large caps and small caps is widening. While the Dow Jones Industrial Average remains a stone’s throw from all-time highs, the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) has been getting hammered. And the latest saber rattling between Trump and North Korea certainly isn’t helping matters. The IWM fell to a new two-month low on Wednesday.
While the wishy-washy action may just be a byproduct of the season, the reality is IWM has been stuck in chop-land for the past year. What’s unnerving about the latest downturn is it upended what could have been the long-awaited breakout for small caps.
Last month IWM finally popped above resistance, but buyers were unable to defend their foothold. With this week’s drop, the fund is now back below its 50-day moving average.
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Small-cap bulls have two silver linings in the short run.
First, buyers swooped-in and bought today’s down gap relatively quickly. Traders could have used the North Korea drama as an excuse to head for the hills, but they didn’t. So far, the bid beneath the market is holding firm.
Second, the $139 support level was tested this morning and is holding firm so far. Provided we remain above this threshold, buyers need not panic.
And yet, even if IWM bounces from here, it has a lot of resistance to work through.
Exploit IWM Weakness
If you think this morning’s bounce is that of the dead-cat variety, or if you simply need to up your bearish exposure, consider selling IWM bear call spreads. Sell the Sep $144/$147 bear call spread for 43 cents. Think of this as a wager that IWM won’t make a new high over the next five weeks.
The max reward of 43 cents will be captured if the fund sits below $144 at expiration. The max risk of $2.57 represents the cost of the position and will only be lost if the fund rallies above $147 by expiration. To minimize the loss, I suggest bailing on a break above $144.
As of this writing, Tyler Craig held neutral option positions on the Russell 2000 Index. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
