After a surprisingly slow first half of the year, the Russell 2000 has been hitting new highs this week, and so has the iShares Russell 2000 ETF (IWM) which tracks the small-cap index. The IWM is known to be more volatile than the broader market, but much of its action this year has been quite mundane, as it has underperformed all the other index ETFs.
As the IWM has slowly moved higher, it has formed a tight upward channel. The resistance on this channel comes up at around $144. If shares hit this level, it will be interesting to see whether they stall or take out this level on strong volume to emerge as a market leader.
Another sign that there is little momentum one way or the other in the IWM is the Moving Average Convergence Divergence (MACD). For the most part this year, this indicator has been hovering around the flat line, moving between positive and negative territory on a consistent basis. This indicates that there hasn’t been much of a trend in the IWM, nor has there been much volatility.
While that might be good for investing, trading the IWM has been rough, given the lack of movement. This channel pattern has held up quite well so far this year, and there are a couple reasons to believe that it will continue to hold, indicating the IWM will pull back to the $139 to $140 range sometime over the coming few weeks.First, there’s the VIX, which measures expected volatility of the market over the next 30 days. It’s below 10, and when the VIX drops this low, that means there’s a high level of complacency among investors. When the market is overly bullish/bearish as well, reversals often occur, sending the VIX higher. This would pressure stocks and cause a minor pullback of one to two percent for the IWM. $144 is an actionable resistance level that, with a tight stop, could prove to be a timely short swing trade.
The second reason for IWM to trade down to support is because of how sharply it shot up after the election into the end of 2016. Shares rallied more than $20, or almost 20 percent, in under one month. So this tight range following their big, explosive move last year is understandable.