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iShares Russell 2000 Index (ETF) (IWM) Is About to Break Out

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Buyers continue to reign on Wall Street. Large-cap indices across the board tagged new all-time highs last week. But what's particularly interesting heading into the new week is the mega-breakout looming in small-caps. The Russell 2000 Index and its accompanying ETF - the iShares Russell 2000 Index (ETF) (NYSEARCA: IWM ) - are poised to play some catch-up.

Since screaming higher following the election, IWM has been in a two-month holding pattern. Let's call it a high base, and a tight one at that. For all its shaking and baking, the IWM ETF has remained stuck in a 3.6% range between $133.50 and $138.50. With Friday's pop, small-caps are now testing the top-end of the range.

And since the rest of the broad market indices have already soared to new heights, I see little reason why the Russell 2000 can't follow suit.

One of the reasons why breakout patterns appeal to the chart-watching class is the ease with which trades can be built around them. A common trigger is to enter bullish trades once the stock finally succeeds in breaking above resistance. Such a victory is telling. It signals that buyers have finally mustered the strength to breach a ceiling that was previously unbreachable.

That type of force often results in multiple days of follow-through until the buying binge eventually exhausts itself.

Click to Enlarge Source: OptionsAnalytix

For IWM, the level to watch going into the new week is $138.82. Although Friday's rally rose above a few minor resistance levels, $138.82 remains the all-time high for the fund.

This price needs to broken for the bullish party to begin in earnest.

Embrace Small-Caps for Big Profits

With implied volatility circling the drain, long option trades remain a cheap way to grab exposure to IWM. Buy the April $138/$143 bull call spread for around $2.25. The $5-wide vertical consists of buying the $138 call while selling the $143 call. The initial cost of $2.25 represents the max risk and will be forfeited if IWM sits below $138 at expiration.

To minimize the damage, you could consider exiting if IWM falls below the lower end of its range at $134. A decline below that threshold will invalidate any breakout attempt.

On the profit side, the IWM call vertical spread offers $2.75 of potential reward that you will capture if the ETF can rise above $143 by expiration.

As of this writing, Tyler Craig owned bullish positions on IWM.

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The post iShares Russell 2000 Index (ETF) (IWM) Is About to Break Out appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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