Small-capitalization stocks as represented by the iShares Russell 2000 ETF (NYSEARCA:IWM) have tumbled just about 5% over the past month and fell more than 1% yesterday alone. This newfound weakness on the charts also has the IWM ETF targeting a next well-defined downside profit target for active investors and traders to focus around.
Small-capitalization stocks have a tendency to be a leading indicator for the broader US stock market as both its greater exposure to the domestic US economy as well as higher volatility than large-cap indices is noteworthy. To be clear, a one-day divergence between small caps and their larger-cap siblings does not make a trend, but the recent divergence has now been taking place for several weeks and could ultimately also infect (for a trade) the S&P 500, i.e. lead larger-capitalization stocks to mean-revert lower to a degree.
IWM Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multiyear weekly chart, we see that the IWM ETF remains in a well-defined upward channel that it has traded within since 2016. Note that each time the index reached the upper end of the channel, it either consolidated sideways or moved lower. Then, at the lower end of the channel, which also lines up with the yellow 50-week simple moving average, buyers began to step in again.
Just because the ETF reaches the upper end of trend, however, does not mean it is on immediate course to drop lower. Price action must still confirm a turnaround lower, such as it has done over the past few weeks.
Through this lens the Russell 2000 ETF now looks ripe to test the lower end of the aforementioned trading range.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that the selling pressure in the IWM ETF over the past few days has forced it to slice below both its 50- and 100-day simple moving averages and now looks set to move toward its next downside target at the red 200-day moving average. This next downside target around $160-$161 is also where previous horizontal resistance (blue line) comes in. Active investors and traders could thus now look to either short the IWM ETF or buy puts or put spreads. As a cautionary note, this ETF has just tumbled for several weeks in a row and may be immediate term oversold. Nevertheless, the aforementioned downside target stands in my eye.
This most recent selling spree in the IWM ETF began in early September with a clear bearish reversal move. Such bearish (and bullish) reversals are of crucial importance to be able to spot for success as a trader and investor. I am holding a special webinar on today for InvestorPlace readers all about these reversal patterns and how to easily spot them. Register here.
Quickly spot strong bullish and bearish reversals on the charts. Special Webinar Wednesday October 3rd.
