While large-caps have been floundering, the little guys have held firm. Indeed, the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) boasts a much stronger chart than the S&P 500, Dow Jones Industrial Average or Nasdaq. And that makes it the top pick for bullish trades if you’re willing to wager its leadership persists.
To better build a trade and understand the power of its position, let’s take a deep dive into IWM’s price action.
A weekly view reveals just how shallow the retreat of the past two weeks has been. Buyers emerged much quicker than the February episode, showing a willingness to take on risk at higher prices. Furthermore, unlike its large-cap brethren, the IWM ETF remains very close to its prior peak, suggesting we could soon see new record highs. With today’s rally (IWM is up 1% this morning), we’re seeing a weekly bullish hammer candle in the making.
After last month’s crash, IWM began carving out an upward channel. This week’s pullback returned the fund to its lower trendline and buyers are dutifully stepping up to defend their turf.
The fact that small-caps have been able to remain above the 50-day and 20-day moving averages is also telling. Large-caps haven’t fared near as well and are currently submerged beneath both.
The IWM ETF Trade
Until the S&P 500 and Dow can reclaim their respective 50-day moving averages, I’m reluctant to structure an overly bullish play for IWM. Instead, let’s play the odds with a higher-probability trade that will profit even if IWM treads water for the next month. Consider this a bet that the fund will remain aloft and not get dragged lower into the mud with large-caps.
Sell the April $152/$148 bull put for 50 cents. The max gain is limited to the initial 50 cent credit and will be captured if the puts expire out-of-the-money. The max loss is $3.50 and will be forfeited if both puts sit in-the-money at expiration. To minimize the damage, you could exit on a break below the $152 short put strike.
As of this writing, Tyler Craig held bullish options positions in IWM. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
