The bull run in stocks this year has by and large been a large-cap affair. Like a vacuum, the largest corporations on the planet have been sucking up cash from every corner of the Street — and the little guys have been left out. Indeed, small caps have lagged by a wide margin. To wit: the S&P 500 is up 10% year-to-date while the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) is only up 6%.
Of course, the contrast is even starker if we compared IWM to the Nasdaq which is up an impressive 20%.
But the nature of rotation is that all down-and-out sectors eventually receive their time in the spotlight. And if recent developments in IWM are any indication, the little guys could be ready to shine. And that could mean big profits await for those willing to give this underperforming market segment a shot.
Let’s head to the charts to see what all the fuss is about.
IWM Stock Charts
The trading range in small-caps this year has been incredibly consistent. We’ve seen numerous tests of the upper and lower end of the range, but thus far support and resistance have held firm. And the upside pressure has increased in recent months. The past seven weekly candle lows are all clustered above the 20-week moving average, and the number of knocks on resistance near $142.50 is increasing.
Eventually, the door will open and buyers will be allowed to charge through. One of the nice things about the setup in IWM is it’s far from being overbought. Unlike many big-cap high flyers that are skirting the stratosphere, small-caps have been resting for months, storing up gas for their eventual breakout.
A breakout in IWM would also help combat the argument that the 2017 bull run is running on fumes. A groundswell in participation by the Russell 2000 could bring new energy and kick off the next leg of this year’s bull run.
You can see the relative weakness in the Comparative Relative Strength (CRS) indicator in the accompanying daily chart. Remember, when the ratio is falling, it means IWM is underperforming the S&P 500. And, well, it has been plumbing the depths all year long. But recently IWM has perked up on a relative basis, and it’s now attacking this year’s descending trendline. A solid break above this level will help confirm the baton has been passed to the little guys.
IWM has tested the $142.60 level multiple times this summer. And, thus far, each breakout attempt has been rebuffed. But sooner or later, something has to give. And with the overall market’s robust rebound from June’s downturn, I’m thinking it’s going to be sooner.
The IWM Breakout Trade
This trade setup can be as simple as you want it to be. Equity traders can buy IWM over the $142.60 resistance zone. Last Thursday’s low near $140.38 is a logical stop area for swing traders. If you don’t mind a looser stop and want to position trade, then consider the pivot low of $139.
On the options front, implied volatility has once again returned to the basement. IWM’s IV Rank is zero which means options are as cheap as they’ve been all year. So if you really want to swing for the fence, long calls aren’t a bad way to go here.
Buy the IWM Sep $142 call option for $3.15 or better. If the break of the $142.60 resistance level holds, the cost will be higher. But, that’s the price you pay for confirmation!
As of this writing, Tyler Craig held neutral option positions in 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.
