Just a handful of stocks have driven the huge rally in the major indices this year.

Big gains in leaders like Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA) have seen the Nasdaq and S&P 500 rally around 43% and 18%, respectively, since the start of the year.

And all that comes after the pullback since both indices peaked in July.

Yet these winners have left behind another segment that often thrives in bull markets.

The iShares Russell 2000 ETF (IWM) is an ETF that tracks 2000 small- to mid-cap stocks. It is only up around 8% year-to-date and is stuck in a sideways pattern.

After falling from its late July peak, IWM is now trying to hold a short-term support level.

Today, I want to see what’s in store from here.

Breaking Through Resistance

The 50-day moving average (MA, blue line) on the chart below shows XLY’s general sideways trend.

Despite swinging back and forth, it is only slightly higher than where it was a year ago.

iShares Russell 2000 ETF (IWM)

Source: eSignal

You can see this broad sideways pattern between the upper and lower levels (orange lines ‘A’ and ‘C’). The 10-day MA (red line) shows that there have been some decent-sized swings.

There was a steep move up from December to January. After that, the 10-day MA experienced a strong retracement from February into March. Then we saw it rally from June into July before the sharp reversal last month.

Each rally began when the Relative Strength Index (RSI) rose from oversold territory (both red lines). But you should notice a difference between the two.

Take another look:

iShares Russell 2000 ETF (IWM)

Source: eSignal

When the RSI rallied in December (left red line), it gained traction so IWM could soar higher.

But the RSI was unable to rise into its upper range in late March (right red line). And IWM’s emerging rally lost momentum.

IWM only rallied to its July 31 peak when the RSI finally broke higher in June.

It has since retraced off that late July peak. But the chart shows that IWM has been building short-term support (orange line ‘B’) since August.

That has coincided with the RSI rallying from oversold territory.

It briefly pierced resistance. Yet the RSI has been unable to hold itself in the upper range (red circle) so far this month, right as IWM continues to test short-term support.

So what am I looking for next?

Testing Support

From March to May, IWM was unable to sustain any rally with the RSI stuck in its lower band.

IWM’s rally was only able to begin when the RSI broke out in June and January.

So for IWM to rally from here, the RSI must first break through resistance and stay in its upper band.

If the RSI remains stuck in its lower range, it will become more difficult for IWM to hold short-term support.

From there, a break below support along with continued weak RSI could set IWM up for another leg down.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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