The Russell 2000 Small-Cap Index can often act as a leading indicator for the broader market. And, when I checked out a weekly chart of the IWM today (April 2), I saw a potential trend-reversal pattern that deserves to be watched.
Small-cap companies are generally regarded to be those with market caps of between $300 million and $2 billion. Most are U.S.-centric, as they mainly conduct their business and services in the U.S..
As a leading indicator, the small cap index is known to lead the broad market out of bear markets and into bull markets, as well as leading the market out of a bull market and into a new drawdown or correction.
An easy way to watch (and possibly trade) the Russell 2000 index is to bring up a chart of the Russell 2000 Small-Cap ETF, symbol IWM.
iShares Russell 2000 Weekly Chart
Chart Courtesy MetaStock
As you can see, the IWM made a relative low in February of 2016 (along with other major indices) and then rallied, moving nicely up its 30-week simple moving average (with a couple of quick stumbles) to the present time, and closed today at $148.29.
Here’s the problem: As you can see, the IWM is currently in the process of developing a double-top—a uptrend reversal pattern (highlighted).
Now, please understand, the double-top has not completely formed yet – and it may not. To be fully formed, IWM’s price will need to fall to $142.50. If it does so, and price falls to close below that level, then the top reversal pattern will be in place. From there, a measured move could gradually send the IWM toward $130.00. Furthermore, a fully-formed double top on the IWM could pressure the S&P 500 and other major indexes to the downside.
If the IWM does not form a double top from here, I will happily exhale. If it does develop a completed double-top, however, I will raise more cash and await the great opportunities that we will see a few weeks down the road.