A notable divergence has cropped up between companies of varying sizes. While large-caps have continued to defy gravity, rising day-after-day amid a low-volatility grind, small-caps are retreating. Look no further than the S&P 500 and iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) for proof. That has been the story for the past few weeks, and there are likely multiple culprits. The most logical is some good, old-fashion rotation. And it’s not like IWM didn’t deserve a little respite.
Small-caps scored an epic pole-vault in September, delivering them to dizzying heights. A mild bout of profit-taking is just what the doctor ordered after such a jaw-dropping run.
Fortunately for those still gung-ho about the little guys, the two-and-half-week retreat has formed a textbook bull flag pattern that is just now testing the 20-day moving average. As the accompanying chart shows, the flag is simply a descending channel transpiring on below-average volume.
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The lack of participation shows just how little selling aggression is entering the marketplace which is a bullish omen after such a robust rise by the IWM ETF.
Traders looking to game the next ascent in small-caps have two choices. The first is anticipatory and the second is reactionary. While the first promises superior prices in exchange for less confirmation, the second offers a worse price in exchange for more confirmation.
As with just about any trading situation, you get to pick your poison.
Choice number one is to buy today’s dip, assuming that buyers will soon rush in to end the bull flag and kick off the next advance. Choice number two is to wait for the flag to complete (by a rise above $150) and then deploy your trade.
The IWM ETF Strategy
Given the extremely bullish posture of the overall market, not to mention strong seasonality on the horizon and low volatility, I think an aggressive bull call spread is worth a shot. Buy the Dec $150/$155 bull call spread for $1.75.
If you wait for the stock to pop above $150 before pulling the trigger, then the price will be a fair bit higher (but you’ll have confirmation the flag is complete).
As of this writing, Tyler Craig held bullish 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.
