When heavyweight stocks rise in a bull market, smaller-cap stocks usually come along for the ride.

Yet despite the Nasdaq and S&P 500 making big gains last year, the iShares Russell 2000 ETF (IWM) initially struggled to make any headway at all. (IWM tracks 2,000 small- to mid-cap stocks.)

IWM bottomed out in late October. At that point, it was down 7% year-to-date.

Yet the broader market surged from November onward. And IWM finally saw its fortunes turn around. In just two months, it gained around 27% (trough to peak).

After that sharp reversal, though, it’s drifting lower in 2024. So let’s see what’s coming next…

Tradeable Moves

The 50-day Moving Average (MA, blue line) in the chart below shows IWM’s broad sideways trend.

Within this pattern, though, the 10-day MA (red line) shows that there have been plenty of tradeable moves:

iShares Russell 2000 ETF (IWM)

Source: eSignal

You can see a rally and reversal at the start of last year (‘A’). The climb up to IWM’s late July high followed (‘B’).

When we checked in on IWM in September (red arrow), though, it was fighting to hold short-term support within the middle of that range.

At that time, the Relative Strength Index (RSI) couldn’t gain any traction above resistance (green line).

As we noted, if the RSI remained stuck in its lower band, then it would become increasingly difficult for IWM to hold support. A break below support could then set IWM up for another leg lower.

And as you can see, that is how things unfolded.

IWM fell steadily through late October along with two distinct bearish signals:

1. The RSI remained stuck in its lower half.

2. The 10-day MA crossed below the 50-day MA with both MAs then tracking lower.

Then IWM’s November rally got going with a huge reversal higher in momentum.

Take another look:

iShares Russell 2000 ETF (IWM)

Source: eSignal

As the chart shows, the RSI ramped up through resistance and into the upper half of its range.

The 10-day MA also crossed strongly back above the 50-day MA and accelerated higher.

That move petered out and retraced (‘C’), though, off the back of a new pattern. We saw the price and RSI diverge (orange lines) throughout December.

The RSI making lower highs from overbought territory (lower orange line) eventually pulled IWM down.

And now the RSI recently broke through support (red circle). So what should we look for around here?

Emerging Downtrend

Without sustained buying momentum, it becomes increasingly difficult for a stock to surge.

So with the RSI recently falling below support, what happens next will be key.

When the RSI remained stuck in its lower band from August to late October, IWM was unable to counter-rally. Instead, it continued to fall.

If that RSI pattern repeats here, we can expect IWM’s current down move to accelerate.

The chart also shows that the two MAs have closed in on each other since IWM’s peak at ‘C.’

The 10-day MA crossing below the 50-day MA would add further weight to any emerging down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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