The Russell 2000 small-caps ETF, IWM, has taken a beating the past few months trading within a 13-point channel. After significant selling to close the last week it is now at a crucial do-or-die point that could impact the broader markets significantly.
IWM retested multi-year trend support Friday coming within about 0.5% of a direct hit. Nonetheless, I’ll consider this a touch and the third (fourth if you count the May $107 low ) which makes this a very strong trendline.
However, that doesn’t mean it cannot be broken. In fact, what clearly stands out is the potential for a double top which is a decent, but not great, chart pattern. For the double top to even have a chance this trendline has to be broken.
In the pre-market trading we’re seeing a healthy bounce this morning as IWM is now back into the $111′s. I’m going to treat this last test as a successful bounce but until a new uptrend takes shape I have to remain strongly cautious of yet another retest and possible failure.
The daily chart shows a steep selloff well under the 2 deviation bollinger band but a strong bounce. With today’s follow through at least in pre-market I want to take a long position in the small caps. The $113 area will be first resistance and I’ll have to see how IWM handles this area before making my next move. I expect that test to come as early as today but should be by tomorrow.
The trade: long IWM $112 Aug 16 calls which closed at $110 Friday and should be about the same this morning. I’ll be picking up four contracts (five if can get under $100). We have to expect some possible volatility today. We don’t want to get shaken out but we don’t want to stick around for a retest of Friday’s lows (which could fail). IWM did set a decent base above $110.25 going into the afternoon. I’ll allow for potential overshoot as well down to $110. This will effectively put our risk up to half of the position so I’m accepting the possibility of losing 50% of this position.