IWM: Something is Rotten in the State of Markets

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Primary 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 () 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 - 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.

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spy_master provided two excellent long-term charts of IWM this morning that compliments this discussion greatly. His comment about each chart is in quotation marks below the chart:

Chart 1 from spy_master
"In terms of regression, IWM is clearly bear flagging on the weekly timeframe and it will very likely head to the -3 SD or -4 SD during the recession. I wouldn't be looking to buy as a long term investment until I see a long lower wick or reversal pattern around the -3 or -4 SD." **Note that the each "SD" (standard deviation) SPY refers to is one diagonal line away from the middle line (line of best fit / mean).

Chart 2 from spy_master

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The previous update excluded a chart in advertently. This update corrects that error.

spy_master provided two excellent long-term charts of IWM this morning that compliments this discussion greatly. His comment about each chart is in quotation marks below the chart:

Chart 1 from spy_master

"In terms of regression, IWM is clearly bear flagging on the weekly timeframe and it will very likely head to the -3 SD or -4 SD during the recession. I wouldn't be looking to buy as a long term investment until I see a long lower wick or reversal pattern around the -3 or -4 SD." **Note that the each "SD" (standard deviation) SPY refers to is one diagonal line away from the middle line (line of best fit / mean).

Chart 2 from spy_master

"My research shows that this regression channel is skewed by monetary easing, which has ended. So I would definitely not be surprised at all if we reached the -5 SD during the recession. That would look like IWM price in the 90s if the recession causes a massive equity vol spike. That would roughly also correspond to the 2016 and 2020 horizontal support."

And in fact, since this update is being reposted, consider this final chart. spy_master had shared a chart dividing IWM by M2SL, which adds additional insight. This chart compares IWM to the money supply. ST recreated this chart and added some trendlines for a little perspective:
Chart 3

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This Russell 2000 / IWM post was published over a week ago on April 10 last week. So far, nothing has changed as to the key points and analyses from this post and its arguments about the how this particular small-cap index affects the overall state of markets.

Yesterday, a technical analyst posted another interesting perspective on this relationship b/w IWM and SPX. It's worth considering here as it confirms the view above and also gives a different way of looking at IWM's outperformance. It's analogous to a camera providing a different angle for the audience, which can emphasize the same point in a different way:
twitter.com/the_chart_life/status/1648003451157094400

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Very little has changed since this was posted 15 calendar days ago. The main point of this post was to show (1) the underperformance of IWM vs. SPX as well as (2) the likelihood of continued sideways action. The sideways action has occurred on higher time frames over the past 15 days (daily chart / weekly chart). In fact, 15 days ago, IWM's price was around $173.89. Today it is $173.40 intraday.

The major support and resistance areas continue to remain valid.

IWM continues to underperform other US majors as this updated RS chart shows:

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In addition, SquishTrade gave an edge to the bears in the original post provided that price stayed below specific levels identified. The most important levels to track measure the continued edge that bears may have were discussed above. Quoting the original post: "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)."

Lastly, note that $170 is major support (above the rectangular longer-term support shown on the primary chart). $170 is also an important retracement level (green 50% retrace on the primary chart). A weekly close below would not be very constructive.

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Let us check up again on this IWM analysis. Little has changed since it was published on April 10, 2023 or since the prior update in late April 2023.
IWM's price was at 173.89 at the moment of publication as seen on the primary chart. Since then, consider the weekly closes as evidence of how the sideways thesis for Russell 2000 has unfolded since it was presented over a month ago:

Weekly closes starting with this past week and working in reverse chronological order:
1. 172.72 (week of May 8, 2023)
2. 174.45
3. 175.20
4. 177.56
5. 176.51
6. 173.89 (week of April 3, 2023)

IWM's relative performance has worsened slightly since April 10 as seen below (the green line connects the date of publication to May 12, 2023):

Importantly, this relative chart shows that IWM / Russell 2000 has not found any footing relative to SPX since early April 2023. Further, the relative ratio remains below major resistance and above critical support. No evidence of any *positive* change in the most liquid sensitive firms appears here.

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For the past 7 weeks or so, the hypothetical price path drawn on the main chart has played out reasonably well. It wasn't intended to play out perfectly.
Instead, it was intended to show merely that price could continue chopping sideways within a range until the economic problems implied by the yield curves begin to unfold.

As described in the above post: "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."

SquishTrade would like to extend that statement and state that sideways action is possible *until one of the major support / resistance levels containing price for the past year is broken decisively."

The important level to break for bears will be the major supports shown above (lows from 2022 around $162.50 - 162.70, and a Fibonacci level at $170).

Bulls have quite a bit more work, which is surprising given all the bullish takes on equity markets in general lately. But the bullish excitement and violent rallies have been largely contained in NDX, AI-related tech, etc., as everyone probably knows. The red flag is that the Russell 2000 (IWM) and many other stocks simply aren't participating.

In any event, as most readers already know, don't trade based on an arrow drawn on someone's chart—whether that arrow is mine or anyone else's arrow. This is important no matter how experienced the author is or how many certifications the person has. Identify what is happening in the larger context. Find levels. Understand what is happening in shorter and longer-term time frames, and then manage risk.

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IWM / Russell 2000 was stronger this week than SPY / SPX.

But IWM price remains 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).

And the major support and resistance zones continue to remain intact, as shown in the chart above as well, and price continues to remain sideways between these levels on the highest time frames since January 2022 (about 1.5 years).

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Ray Dalio just published an article in Time entitled "Why the World Is on the Brink of the Great Disorder." I recommend that investors read this if you can. Ray Dalio was the founder and co-chief investment officer of one of the largest and most successful hedge funds in history. He explains why there are storm clouds brewing ahead. This doesn't mean markets are going to crash next week—but it's important to read this and think about what its ramifications might be for the next several years, maybe the next decade. spy_master often discusses these issues, so if you haven't followed SPY_Master, do so!