Small-cap stocks, as represented by the iShares Russell 2000 ETF (NYSEARCA:IWM), are down about 13% from their all-time highs set in August 2018, while still being higher by about 13% year-to-date. Looking at the IWM ETF through the lens of technical analysis, it is now up against a well-defined area of resistance, which allows traders to place well-defined shorts for a trade.
As I often discuss in this column, the more clearly defined a trader’s risk is, the better the odds he or she actually sticks to these rules. My trade idea for the Russell 2000 exchange-traded fund qualifies as a trade where risk is very well defined.
IWM ETF Charts
For some perspective let’s first look at the multi-year weekly chart of the IWM ETF.
Here we see that for the most part, the index has nicely respected its upward sloping channel. In late December 2018, the ETF bounced off the lower end of the trend and just a few weeks ago, it rejected the upper end of this trend. From this perspective, almost regardless of how potentially bullish an outcome for stocks may be, the chances are that the IWM ETF will be capped within the confines of this trend channel.
But the Russell 2000 isn’t just 13% off its all-time highs, it has also dramatically under performed the S&P 500 over the past nine months. See the bottom part of the chart, i.e., the orange line, which represents this relative under performance.
Moving on to the daily chart we see that around the $155 area IWM has a layer of technical resistance. This layer is made up of some horizontal price resistance, but more importantly, it is where the 50-, 100- and 200-day simple moving averages all converge. While this by no means indicates that it is a guarantee the index will remain below, i.e., absolutely respect this area as technical resistance, it is a very clearly defined price level that traders can lean against for shorts.
As usual, the best part of this trade idea is not how much we could possibly make if the IWM ETF drops, but how clearly defined our stop loss area is — any push above $155 is an automatic stop loss.
This short could be entered with the IWM trading around $150 – $153, using a downside target of $145.
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