Despite a strong week, IWM remains in trading range

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Primary Chart: IWM / Russell 2000 Weekly Timeframe

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. This is why the Russell 2000 is important for traders and investors to follow to maintain a deeper understanding of the broader US equity markets.

Despite a very strong weekly close for IWM, its price remains in the lower half of its trading range. This trading range has contained price for the past 1.5 years, since the topping pattern's support (at the upper blue rectangle) broke down in January 2022. Unlike other major US indices like the Nasdaq 100, IWM has continued to struggle and remains well below its August 2022 and January / February 2023 highs.

Two months ago, in a recent post titled "Something is Rotten in the State of Markets," IWM's underperformance of SPX provided a basis for discussion as to why US equity markets may remain unhealthy despite the bullish price action YTD (see link below). A strong and long-lasting bull market should show signs of broad participation. Many breadth indicators have shown very narrow breadth. It's not a surprise, in fact, that SPX's rally and upside performance has been driven by 5 to 10 SPX names, with the other 490-495 flat, lagging, or up weakly.

Supplementary Chart A

IWM: Something is Rotten in the State of Markets

This previous April 10 analysis displayed a hypothetical price path intended to reflect the possibility of more sideways and choppy price action in the intermediate term. The choppy price action has largely unfolded as expected (click the play / refresh arrow on the prior post from April 10, 2023). In fact, IWM's price at the time of the prior post was at $173.89, and a month later on May 8 it had closed almost at the same level around $172.72.

Now IWM appears to be breaking above the recent trading range. Major levels of resistance appear on the Primary Chart as Fibonacci levels (the .618 retracement and the .50 retracement, which is not technically a Fibonacci proportion) as well as the anchored VWAP from the November 2021 ATH. How price responds to these levels will be important to watch in coming weeks especially after June 16, 2023 OPEX—a quad witching event.

It is notable that IWM trades far below its major ATH VWAP from November 2021. Compare how IWM's price trades relative to this VWAP (labeled on the Primary Chart above) with how SPY's price trades relative to its ATH VWAP. SPY's VWAP anchored to its ATH is shown in Supplementary chart B below.

Supplementary Chart B

Finally, a relative chart of Russell 2000 vs. S&P 500 is helpful to examine these two major US equity indices and how IWM has performed YTD relative to the SPY / SPX. See Supplementary Chart C below. This relative chart shows IWM still in a downtrend relative to SPY. And it still shows that IWM vs. SPY remains below major resistance. Given that IWM is a leading index at times, it will be interesting to see whether what happens to the major resistance on this relative chart that was broken in early April 2023. Will it hold?

Supplementary Chart C

In summary, the small-cap stocks in the US equity market are lagging despite putting in a strong weekly performance this week of +3.33%. The primary trend in small caps remains sideways by any measure. Will IWM play catch up to the other main US indices like S&P 500 ( ) and Nasdaq 100 ( )? No one knows for sure. But the liquidity problems plaguing the US economy tend to show up in the weakest names first, which usually are also the smallest names. Could IWM's underperformance be a sign of this liquidity stress? Or will it catch up to confirm that the current rally in NDX and SPY are perfectly healthy under the hood and headed to new all-time highs? Stay tuned.

And thanks for reading this and for your encouragement and support.
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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.

Nota

Today, IWM trades slightly > 50% retracement at 183.36 shown as a green line on the primary chart. The weekly close may be near this level as OPEX pinning clearly has started to take place especially noticeable in SPX and NDX today.

Nota

/ Russell 2000's strength last week caused a break above the 200-day MA. That key daily MA is not shown on the weekly chart in the original post above.

But the slope of that 200-day MA remains slightly down. It should probably be watched in the coming weeks given price's interaction with it. The 200-day is shown in black in this chart below:

Because the 200-day MA is so widely followed, it can serve as an important level.

Nota

Markets seem to move much faster today than in years past. IWM has moved up another 1.54% today to contend with the .618 Fibonacci level shown on the primary chart (yellow) at $187.11.

Nota

IWM is moving fast. It seems to be playing catch up to the other indices. It has risen about +8.5% in about 6 trading sessions.

Today, the Nasdaq 100 was down almost -2.0% (-1.75% to be exact), and SPX was down only marginally about -.38%. But the Russell 2000 / IWM was up on the day by about +1.59%.

IWM's daily candle closed right on top of its .618 Fibonacci retracement as well. The close was literally within a few cents of this important Fibonacci retracement.

Nota

One further level to consider is at $188.72. This is the 1.618 Fibonacci projection (sometimes called extension) of the initial wave upward from the March 24, 2023 low. Then project that initial rally leg from the low on May 4, and 1.618 proportion of that leg = 188.72. This nearly coincides with the .618 R drawn above. If price can close the week above these levels, it may imply further upside to retest the upward TL from the October 2022 low that was broken to the downside in March 2023.

Such a retest could be about $188-$190 depending on the data as the line slopes upward and each date that passes implies a higher retest price.

Nota

After such a frenzy of call buying the past 6-7 sessions, IWM looks to be stalling slightly (obviously not a reversal, just a stall on shorter time frames) at the .618 Fibonacci R = 187.11, which also aligns with 1.618 projection at 188.72.

Options market experts have been saying that that a frenzy of call buying has occurred in IWM. In fact, here is a statistic dropped by one of my favorite gamma experts, SpotGamma: IWM experienced the 2nd largest call volume day ever yesterday, June 7, which is 2nd only to Tuesday, June 6, which was the largest call volume day ever for IWM.

Such increases in options activity have been building since 2020 though in all indices, with new records made frequently as 0DTE options trading has exploded, especially as CBOE added expirations so that now options expire every day of the week for both SPX and SPY.

Is this a type of FOMO where investors and traders chase this year's rally, disappointed at having missed out on SPX and NDX / QQQ, by buying up the laggard index and names?

Nota

IWM has rallied right to the upward trendline from October 2022 lows that had been previously broken to the downside. This roughly coincides this week with the anchored VWAP from IWM's all-time high. And it coincides with a 1.618 Fibonacci projection (extension) as well:

This is an important area for the Russell 2000. These levels were mentioned as potential targets in prior updates as well.

Nota

IWM / Russell 2000 remains just underneath the upward TL from October 2022 lows that had previously been broken to the downside. The anchored VWAP from IWM's all-time high still lies just overhead as resistance as well, and shows confluence with this upward trendline.

Nota

These levels have been discussed before, but it helps to reiterate them as price has reached this area.

In the chart just posted earlier today, a few moments ago, notice the confluence of 3 major resistance levels:
$186.45 - .618 retracement
$189.45 - anchored VWAP from the ATH
$189.33 - 1.618 projection of the first leg of rally off March 2023
$189-$190 - upward TL from October 2022 lows that was broken to the downside back in March 2023

This is the make-or-break level for IWM. All eyes should be on IWM because it still hasn't confirmed the rally in SPX and NDX. Instead, it's made lower highs since July / August 2022.

Nota

IWM / Russell 2000 closed the week last week with a somewhat bearish shooting-star candle. This is also called an inverted hammer. What's more, it appeared right at major resistance of an anchored VWAP and the uptrend line from October 2022 lows that was broken in early March 2023.

It will be interesting to see whether this bearish candle with a long upper shadow will lead to some sort of reversal, whether a few candles of downside or something bigger remains unclear.

Nota

On a relative basis, IWM continues to underperform SPY. Look at the arrow showing where the relative-strength ratio failed in early June right at its resistance level:

Nota

After this week's down close, it looks like IWM has rejected on its first attempt at overcoming the 61.8% Fib retracement.

And despite the daily and weekly wiggles, it's still within this long-term trading range shown above.

Nota

End of June update:

Today, IWM / Russell 2000 closed at $187.27, the final weekly close in June 2023, and a monthly and quarterly close. IWM closed June 2023 right at its .618 Fib retracement (yellow / gold line)) shown on the primary chart—actually, a few cents (.16) above this level. But IWM closed below its prior swing high from June 14, 2023. This post initially came when IWM traded at $182.09 on the daily / weekly close June 2. Over the next four weeks in June, IWM saw a price range that was fairly narrow: $178.44 to $189.24. So little progress has been made with a lot of ups and downs in between the start and end of June. This is consistent with the choppy, sideways, and range-bound price action that has characterized this small-cap index for 1.5 years.

IWM / Russell 2000 gained about 3.48% in June. While at first glance, this seems impressive, this index remains the laggard among the four US majors. IWM remains below its earlier YTD highs from February 2. In fact, even given the strength this week, it remains below mid-June highs.

Importantly, IWM remains below its all-time high anchored VWAP as well as its February 2, 2023, swing high. But it remains above its 200-day MA. Yet IWM has been chopping both above and below its 200-day MA since November 2022 (8 months ago). This is typical of a sideways, range-bound price dynamic, as argued in the original post.

Little has changed since the start of June 2023 when this post was first published. The long-term 1.5-year trading range has not been altered. It remains unchanged and even untouched for the entire month of June. See the large blue rectangular support and resistance zones portrayed on the primary chart. And the updates this month have tracked failures at key levels within this long-term trending range, and pointed out levels that must be overcome / breached for progress in either direction.

In short, this index’s performance aligned with the sideways / ranging thesis discussed on June 2 above. This still remains a problematic breadth / liquidity warning for the long-term view across indices and sectors. Yet trend followers in the SPX and NDX have done well to ignore breadth, liquidity, yield curve inversions, and more—by focusing just on the trend in the strongest areas, they may have caught some big moves. But will they protect those profits in time? Have too many now piled in the last 5% of the moves to make them weak and top heavy? Does IWM play more catch up or does it suggest the party will end? Let me know your thoughts—it’s definitely worth considering even for those who are broad trend followers in the US major indices. If an index more subject to liquidity problems severely lags and goes sideways when other indices rally hard on narrow breadth, is this a canary in the coal mine for what may be coming?

Nota

Today's price action rejected the .618 retracement at $187.11 for the third week out of the last four weeks (last week closed just a few cents above this level).

Will #NFP print in the US tomorrow decide IWM's fate with respect to this level? This is a binary catalyst that is tough to predict for the directional outcome *into the close.*
A. If the market reaction is positive, then let's see whether the weekly close reclaims the .618 retracement at 187.11. Only if the .618 R is recovered on a weekly close does it make sense for short-term bulls to target the next resistance at $189-$190: the key anchored VWAP from IWM's all-time high lies at $189.27 as of today. If the anchored VWAP from the all-time high can be held, then it makes sense to consider a move into the underside of the upward trendline from the October 2022 lows shown in the original post and the updated chart below.

Note: The blue circles represent edges of the current price range that could be reached under either (a) a bullish scenario, or (b) a bearish scenario. (Above all, risk should be managed. Just because a move looks like it is heading to a given target doesn't mean that the entry is feasible or even ideal.)

No one knows which way the market will move in response to the #NFP print in the US tomorrow. This is why bearish and bullish levels are given. Let's see what happens.

Nota

Lastly, IWM closed at $182.78 today. When this post was published on June 2, 2023, SquishTrade's thesis suggested continued rangebound action despite upward and downward moves. As of July 6th's close at $182.78, this thesis has been even more accurate than expected! An entire month has transpired and price is only a few cents ($.69) above where it was on June 2 as of the close. (Tomorrow, of course, could create greater price distance between the closes from June 2 and present.)

Nota

Two trading days ago, the update queried whether IWM would close above or below the key .618 Fibonacci retracement at $187.11. Since June 2 (nearly 1.5 months), IWM has failed 4 times after closing above this level. IWM has just recovered this level for the 5th time. The close above appeared to be strong enough to hold at least a few days—perhaps into July OPEX on July 21. Will this give IWM enough time to chop around and then retest the failed uptrend line from October 2022 lows? Let's see.

The June 6 update placed a blue circles at bearish and bullish targets, which were moderately conservative given the 1.5 years of rangebound action in this small-cap index. Price appears to have broken higher for now. Yet CPI prints this week too. This could add further fuel to the fire if the CPI print comes in cooler than expected, or it could reverse progress if CPI print comes in hotter.

First half of July tends to be the strongest 2 weeks of the year seasonally. As long as above $187.11 (.618 R), slight edge to the bulls to move price up to at least the uptrend lined despite uncertainty around CPI print.

Nota

IWM has reached the upper bound of its 1-month trading range (red box). This coincides with the anchored VWAP from the all-time high.

Yesterday's update noted that IWM saw a recovery of the .618 Fibonacci retracement at $187.11. This appeared to suggest more short-term strength. But note that over the past month, price has closed above this .618 R at $187.11 four times already only to fail back below this level each time. Is the 5th time the charm? July tends toward bullish seasonality, and flows from monthly open interest in the options complex should be supportive of equities generally into July 21. Let's see.

For now, price must recover the ATH anchored VWAP to think it can push higher. And a failure back below the .618 retracement would take further gains off the table in the short term.

Nota

Important developments this week:

1. Until this week, IWM had traded in a narrow range since June 2 when this post was initially published. The updates have emphasized this tight range round $180-$187.

The range for the past 1.5 months (since early June 2023) can be visualized using the VWAP anchored to the 2022 low and the VWAP anchored from the all-time high. Notice how price traded back and forth between them until June 11-12.

Price broke out of this narrower range that lies within the broader 1.5-year range. Price has also risen and closed a weekly bar above the all-time-high anchored VWAP on June 11-12.

But the longer-term 1.5-year range shown on the primary chart still remains intact, although IWM now trades in the upper third of this range rather than the bottom third. Since June 2, price traded sideways between 178-187 until the breakout above the ATH-anchored VWAP on June 11-12.
In a sense, it seems unsurprising that some of the powerful, perhaps euphoric, bullish sentiment would finally spread out and start to affect the weaker areas of the market like the small-cap index (the index most affected by reductions in liquidity).

The crucial issue will be whether IWM can truly play catch up to the narrow leaders that have carried SPX and NDX to dizzying heights this year. The Russell 2000's 1.5+ year range could be difficult to break, but the bullish narrative is very strong.

In any event, IWM should continue to be watched along with SPX and NDX.

Nota

This chart relates to the broader, 1.5-year trading range referenced in today's earlier update. The 1.5-year trading range is bounded by the blue rectangles (same as primary chart from June 2, 2023).

I've included a few proximate Fibonacci levels as well that seem to be in play as well as the upward trendline that broke to the downside in mid-March 2023. This up trendline is now being retested. Reasonable minds may differ as to its exact placement, so I've drawn two of them, attempting to capture the "range" where it could be considered to lie. In short, this trendline should be in play into July OPEX.

If markets weaken right after July OPEX, this could make it challenging for IWM to hold any breakouts out of its 1.5-year trading range.

Nota

IWM's price struggled at crucial Fibonacci resistance levels and the VWAP from the all-time high, it broke above for a few weeks and moved toward the upper bound of the 1.6 year trading range.
(This post and its updates have discussed the 1.5-year trading range in depth over the past 2.5 months. The range is still intact after 2.5 months since original posting, so it is now a 1.6 year trading range!)

Toward the end of July 2023, price approached the top of the range with a high of $198.75. That weekly candle has a longer upper shadow, showing supply at as the upper end of the range was approached.

After this failure near $200, price has shown weakness, falling back nearly toward the middle of this ongoing trading range. This continues to be important to watch for the health of US equity markets more broadly.

The recent decline over the past 3 weeks has sent price back below the VWAP anchored to IWM's all-time high (shown below). Bulls will want to see this recovered quickly. Bears will want to see it hold below.

Nota

Russell 2000 / IWM update:

The small-cap index is having a bit of a rough start to the week. Why is IWM doing worse than large-cap equity indices like SPX?
Perhaps recession fears are a little more prevalent this week after downward revisions in employment numbers. Seasonality could be a factor too.

Keep an eye on the purple anchored VWAP from its ATH, which has been a relevant level in recent weeks. This morning, IWM quickly broke back below this level after having reclaimed it on last week on Friday, Sept. 1, 2023. This VWAP lies at $189.50 currently.

The broader picture still remains aligned with the analysis from the original post above from over 3 months ago—IWM remains within this sideways trading range that has existed for now almost 20 months, or 1.65 years. Coincidentally, IWM remains at a critical pivot area within this range right now at $187.38, which is the approximate mid-point of the range.

In the shorter-term time frames, IWM fell -8.46% from its July 31 swing high. The swing low was made on August 18, 2023. Now, IWM has retraced a Fibonacci 61.8% of this recent decline. The 61.8% retracement lies at $192.20. Bears will want IWM to hold below $192.20. Bulls want to reclaim this quickly. Falling and holding below the all-time high anchored VWAP today has not been a good start. Keep an eye on this $189-$190 level going forward.

Nota

Click the "refresh" link on the primary IWM chart above. IWM has reached the lower edge of the range once more after nearly tagging the upper edge.

Will IWM head back to the middle of the range? Or break the lower edge? This is worth watching here. This range has held for quite some time, over 1.5 years.

Nota

Refresh the primary chart at the top. Notice how IWM is finding support (at least for now) at the bottom of the long-term trading range, which has now persisted for about 1.7 years. Probably not an ideal spot to be shorting into year end unless there is a decisive and clean break. Maybe that doesn't happen till next year when recession seems more likely to hit.

Nota

It's been almost 2 years since small-caps (represented by IWM / Russell 2000) made their all-time high on November 8, 2021. 2 years = 730 calendar days.

Notice how IWM is reaching the lower boundary of the trading range that has persisted nearly 1.75 years. This is strong support and a logical spot for a bounce (perhaps back into the trading range into year end). Short-term and intermediate-term trends remain downward, but extremely oversold and due for consolidation at a minimum. But if (perhaps when) this low 160s level breaks, look out below. Frequently, price must contend with strong levels before they break.

Nota

The last update discussed the possibility of a bounce (or at a minimum, consolidation of the decline). The extreme lower bound of the 1.75-year trading range acted as major support and price bounced dramatically from this level. The middle of the trading range is the low 180s. The VWAP from the ATH is about $187.

IWM also made a new 2-year low on October 27. This could signal the beginning of a larger-degree trend downward cycle (e.g., a first leg down that is now being retraced potentially), but this rally into year end should be watched to see whether it can stay within the wave of decline from the July 31 highs. The chart below shows the retracement levels for the recent leg of decline. Notice how the .382 Fibonacci retracement has been the first major resistance level. The next is the .50 retracement level at 180 (green), which is about the halfway point, unsurprisingly, of the 1-year trading range. It would seem that despite some consolidation, price could easily reach the halfway point of this trading range. A return to the center of the 1.75 year range would continue to reward mean-reversion / range traders and punish those with rigid directional views (new highs vs. crash imminent mentalities).

In short, small-caps continue to be a fascinating piece of US and global equity markets.

Nota

What a monster move by IWM today! Interestingly, IWM / small caps are the most rate sensitive firms in the publicly traded markets. So this gives some indication of market sentiment following a slightly cooler-than-expected CPI print early on Nov. 14, 2023.

IWM closed about +5.49% higher, far outperforming SPX / SPY and NDX / QQQ. IWM is closing in on the 50% retracement of the most recent major swing high to low (decline) at $180.21, which was discussed in the Nov. 6, 2023, update as a possibility.

SquishTrade

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