Russell 2000 (IWM) Breaks Major 1-Year Support, More Downside
Russell 2000 represented by its ETF counterpart IWM has now broken a major 1-year support level. This level has provided support (with only minor breaks that ended up reversing) since approximately February 2021.
Interestingly, IWM had a failed breakout / rally back in early November 2021. After about 12 trading sessions, the breakout completely collapsed and price re-entered the trading range (shown in the chart above as a yellow-tinted trading channel).
Moreover, Stochastics and ADX/DMI confirm that a downtrend is well underway in the short term (and perhaps the intermediate term). ADX / DMI shows trend levels rising on the daily chart with ADX at 29.70 and -DI rising well above +DI at approx. 36.9. On the weekly chart (not shown above), the ADX / DMI shows even strong downtrend levels at 30.47. The Awesome Oscillator shows increasing downward momentum on the daily chart as well as the weekly chart. And the Fast Stochastics Oscillator (13/1/3) shows oversold readings, but oversold readings in a downtrend tend to confirm the trend and can remain oversold (i.e., not a buy signal in a downtrend). On the weekly chart, my Fast Stochastic shows a pattern characteristic of a downtrend as %D has been printing for the most part under the 30 level for about 8 weeks, with the week of January 3, 2022 rising to 32, barely above the 30 level before turning lower gain. (Note that January 3, 2022 was the end of the year-end Santa Claus rally.)
With this breakdown, what happens next? Nothing is certain, but technical analysis yields reasonable estimates. A bounce is likely given that Stochastics are quite oversold on all time frames. Even though oversold levels may persist, a better risk-reward entry may be provided when and if IWM bounces (perhaps tomorrow). The bounce could retrace a portion of the recent downward move. I might consider a bounce worth selling between 208-210.
I am trading this cautiously (smaller position) with IWM call credit spread. I chose an OTM call credit spread today as a way of keeping risk smaller (i.e., more premium collected = lower capital risk). But OTM call credit spreads also increase the risk of failure because they are OTM. A higher probability play may be an ITM call credit spread (i.e., around 210-215 strikes)—but because the premium collected will be much lower, the risk is higher and the risk reward ratio is worse.
Near-term target: Approximately 190-195. There could be a bounce as described above.
Stop: A close above 211-212. (If IWM starts dropping like a rock tomorrow, it might be better to avoid chasing and wait for the next bounce if there is one.) A better entry would occur after an overbought signal on the Fast Stochastics using shorter term timeframes intraday.
DISCLAIMER: Please do not trade options or IWM securities unless you understand risk, position sizing, and the security product being traded. And please do your own research. I cannot provide financial advice and am not licensed nor offering services as a financial advisor.
Interestingly, IWM had a failed breakout / rally back in early November 2021. After about 12 trading sessions, the breakout completely collapsed and price re-entered the trading range (shown in the chart above as a yellow-tinted trading channel).
Moreover, Stochastics and ADX/DMI confirm that a downtrend is well underway in the short term (and perhaps the intermediate term). ADX / DMI shows trend levels rising on the daily chart with ADX at 29.70 and -DI rising well above +DI at approx. 36.9. On the weekly chart (not shown above), the ADX / DMI shows even strong downtrend levels at 30.47. The Awesome Oscillator shows increasing downward momentum on the daily chart as well as the weekly chart. And the Fast Stochastics Oscillator (13/1/3) shows oversold readings, but oversold readings in a downtrend tend to confirm the trend and can remain oversold (i.e., not a buy signal in a downtrend). On the weekly chart, my Fast Stochastic shows a pattern characteristic of a downtrend as %D has been printing for the most part under the 30 level for about 8 weeks, with the week of January 3, 2022 rising to 32, barely above the 30 level before turning lower gain. (Note that January 3, 2022 was the end of the year-end Santa Claus rally.)
With this breakdown, what happens next? Nothing is certain, but technical analysis yields reasonable estimates. A bounce is likely given that Stochastics are quite oversold on all time frames. Even though oversold levels may persist, a better risk-reward entry may be provided when and if IWM bounces (perhaps tomorrow). The bounce could retrace a portion of the recent downward move. I might consider a bounce worth selling between 208-210.
I am trading this cautiously (smaller position) with IWM call credit spread. I chose an OTM call credit spread today as a way of keeping risk smaller (i.e., more premium collected = lower capital risk). But OTM call credit spreads also increase the risk of failure because they are OTM. A higher probability play may be an ITM call credit spread (i.e., around 210-215 strikes)—but because the premium collected will be much lower, the risk is higher and the risk reward ratio is worse.
Near-term target: Approximately 190-195. There could be a bounce as described above.
Stop: A close above 211-212. (If IWM starts dropping like a rock tomorrow, it might be better to avoid chasing and wait for the next bounce if there is one.) A better entry would occur after an overbought signal on the Fast Stochastics using shorter term timeframes intraday.
DISCLAIMER: Please do not trade options or IWM securities unless you understand risk, position sizing, and the security product being traded. And please do your own research. I cannot provide financial advice and am not licensed nor offering services as a financial advisor.
Comment:
I inadvertently misspoke regarding the call credit spread in the above post. I used an *ITM* call credit spread as a way to collect higher premium and reduce capital risk. ITM call credit spreads are more likely to fail due to lower probability of the underlying falling below the ITM call spread's lower strike. But because the premium is higher, the capital risk ends up being lower: maximum risk on a call credit spread = difference b/w the spread's strikes — total net premium (credit) received. So the higher the premium, the lower the maximum risk. But this comes with a disadvantage or tradeoff as I tried to explain: the spread is ATM or ITM, so its chances of going OTM for a max profit is lower. The chances of success are higher with an *OTM* call credit spread, but b/c the premium collected is lower, the capital risk ends up being higher. Sorry for the confusion and the typographical error.
Comment:
Yesterday, I noted that any bounce today would be worth selling around 208-210. Today's bounce ended at approximately $208.99. I increased exposure but monitored to be sure that the index / IWM was not reversing. My target in the mid 190s is still in play. Cheers!
Trade closed: target reached:
Target reached in the mid-190s. IWM is now extended to the downside, so just a minor pullback (reversion to the mean) within the context of this downtrend could wipe out any bearish positions entered at this level.
Comment:
Now, it appears IWM is forming an inverted head and shoulders, which would negate any bearish technical patterns previously if the inverted H&S is confirmed.
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