Small-cap stocks as represented by the iShares Russell 2000 ETF (NYSEARCA:IWM) are higher by a little more than 20% year-to-date. While most of that performance took place the first two months of the year and IWM trotted sideways for most of 2019, the recent breakout attempt is getting attention and could indeed result in more upside through year-end.
Bulls are always the loudest near market highs, while bears growl the meanest near the lows. In other words, bulls find it easy to make money in up markets (obviously), but over time become complacent as simple ‘techniques,’ such as trading chart breakouts, work like a charm.
To wit, the most recent two-month rally in stocks once again has bulls becoming complacent and thus getting that ‘this is easy’ feeling, which works until it doesn’t. And usually stops working abruptly. This is important to keep in mind as we walk through the current bullish setup in the Russell 2000. Should the current bullish setup fail to follow through it would be wise to respect the change in trend.
But enough of the risk management talk. Let us look at some charts and see how we might be able to make some money with the recent bullish development in the IWM ETF.
IWM Stock Charts
On the multi-year weekly chart we note that the uptrend since 2009 has played itself out in a well-defined trend. In December 2018 the Russell 2000 revisited the low end of said longer-standing uptrend. The index then quickly bounced off those lows into February 2019, only to spend most of 2019 moving sideways.
This week’s rally, however, is giving us signals that the IWM ETF may be ripe for a push higher, possibly into year-end as animal spirits awaken. At the bottom of the chart I added a relative chart of the Russell 2000 versus the S&P 500. Thanks to this week’s rally the Russell 2000 is starting to show some relative strength.
On the daily chart we see that after moving from the low end of the range in October to the very upper end of the range (blue parallels), the IWM ETF over the past couple of weeks began consolidating in a constructive manner. Then this Monday, Nov. 25, a notable 2% rally occurred, pushing IWM out of the ‘bull flag pattern’ and marginally scoring a breakout of the range.
Although IWM here could be overbought as major components like biotech and financials also look a bit stretched near-term, into year-end this index could see another push higher, possibly into the high $160s or low $170s.
Thus, active investors and traders could look to buy the IWM ETF in the $160-$162 zone with a first upside target around $168. Any strong one-day bearish reversal, especially if broad based in the market, would be a stop loss signal.
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