IWM: Something is Rotten in the State of MarketsPrimary Chart: IWM on a weekly timeframe with downtrend line and major support and resistance zones
Note1: IWM is an iShares ETF that represents the Russell 2000 small-cap index in the United States. Though not as widely tracked as SPX, NDX, or DJIA, the Russell 2000 ( TVC:RUT ) is one of the major US indices. It is likely the fourth most watched US index.
Note2: The phrase "something is rotten in the state of Denmark" is a well-known line from Shakespeare's play Hamlet used to describe a situation where something is wrong or even corrupt within a government, institution, or system. No corruption is intended to be implied discussed. The title's allusion to this phrase is meant to suggest only that something is off / wrong in the markets, i.e., that everything is not well despite the strength of the Nasdaq 100 lately and the support seen in SPX.
The Russell 2000 (IWM) is often a leading indicator in US markets. It led to the downside in early November 2021 after a false breakout out of its 2021 topping-pattern's resistance around $234. SPX topped nearly two months later on January 4, 2022. While small-caps are not necessarily always the first to make a move, it is something frequently cited by commentators and analysts.
The primary chart shows how IWM has struggled below the upper blue rectangular zone, a resistance / supply zone going back to highs in March and April 2022. This zone also rejected price at the end of the impressive August 2022 rally that had everyone debating whether the bull-market had returned in earnest. Lastly, on February 2, 2023, IWM was unable to even tag the lower edge of this zone, eking out a high at $199.26. The lower edge of this blue resistance zone as drawn here is at HKEX:200 - HKEX:201 approximately.
The Primary Chart above also shows an important Fibonacci support level at $170. This the 50% retracement of the entire bull market from the 2020 Covid lows to the highs in November 2021. This has also marked important support since late October 2022 (a week or two after the October 2022 lows). Notice the weekly candle wicks protruding below this line but recovering back above it.
The final point about the Primary Chart is the down TL from the all-time high in magenta. This was broken to the upside, which was one of the reasons many market participants and commentators got excited about the bear being complete. That trendline was retested in late March 2023. But despite this positive development, IWM has not acted well. In fact, it has broken decisively below a multi-month upward trendline from October 2022 lows as shown on the Primary Chart as well. This trendline was also important and signifies weakness on the decisive break below it.
On the larger scale, price is trapped between the blue rectangular zones of support and resistance. Until these break, not much progress is likely in either direction. Sideways action is likely for the coming weeks. The one thing that would negate the sideways action view is a clean break back below the down trendline from the all-time high. So keep an eye out for that development.
Next, Supplementary Chart A.1 and A.2 below shows a hypothetical illustration of how price could move sideways for the coming weeks / months before a flush below major support (if one is bearish about equities generally) or a rally above the key resistance zone (if one is bullish about equities generally). SquishTrade gives an edge to the bears in the intermediate to longer-term time frames—as long as price stays below both (1) the uptrend line from October 2022 lows, and (2) the key Fibonacci levels of the most recent decline (shown on the Primary Chart at $183.36 and $187.11).
Supplementary Chart A.1 (measured corrective move upward where the legs of the corrective move might be equal or share a 1.272 Fibonacci relationship)
Supplementary Chart A.2 (choppy sideways action that retests the upward TL from the October 2022 lows that had broken down in March 2023 before heading lower again)
Supplementary Chart B is a zoomed-out version of the major resistance and support level shown on the Primary Chart. This is intended to show the ranging action for months that has taken place despite periods of seemingly impressive strength and sharp weakness.
Supplementary Chart B
The next chart, Supplementary Chart C, illustrates what a trendline might look like if someone were considering this chart afresh, i.e., for the first time without having tracked the prior trendlines during the 2021-2022 bear market. The TL has been re-drawn to account for the recent major highs at the end of the January to February 2023 rally.
Supplementary Chart C
IWM's anchored VWAPs are not encouraging. Here, the only VWAPs considered are the one anchored to the all-time high in November 2021 (blue-purple line) and the 2022 low (orange line). Price made a false breakout above the VWAP from the all-time high and failed back below. That in itself is a negative especially given that this occurred on a larger time frame going back to 2021. Price has also failed below the October 2022 VWAP as well.
Supplementary Chart D
Finally, and most importantly, consider the ratio spread of IWM/SPY in Supplementary Chart E below . This tracks the performance of the Russell 200 relative to the S&P 500. This is why something might be rotten in the state of Denmark (markets). A healthy market should not have an index looking this bad. Let me know what you think in the comments.
Supplementary Chart E
The ratio spread shows that IWM's underperformance just broke below a key support level for that ratio. But bigger support lies below. However, the overall picture looks bleak for IWM with a downtrend line that has lasted for a while, and lower highs for the ratio's value on higher time frames.
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Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
