Today, all of the major stock market indexes are pulling back. The important Russell 2000 Index (IWM) is trading lower by 2.0%. Recently, the IWM has been showing strength as the stock market rally has broadened to many different industry groups. Traders and investors should always remember that the Russell 2000 Index represents small capitalization businesses in the United States. When the small caps catch a bid in the market it tells us that there is an appetite for risk. Since the March 2020 lows, the IWM has retraced about 75% of it’s declines from its January 2020 high. It should also be noted that the Russell 2000 Index is still negative for the year (-9.96%). Recently, it has been a daily chart outperformer on a percentage basis, so this will be important to follow.
Traders will now need to focus on the chart pattern over the next week or two in all of the major stock indexes. Generally, after a large stock market advance the indexes will need to take a breather. This will usually lead to a consolidation pattern or a minor retrace pattern. As long as this happens then another buying opportunity should emerge. Should a major sell off occur and break critical support levels then all bets are off. These markets could experience amplified selling. So just follow the charts and let the market tell you what to do. Rarely will the patterns that form let you down.
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