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As with most equity-based indexes, the Russell 2000 has rallied sharply from the beginning of October, gaining over 9% from the end of September through the high on Friday. While that is an impressive rally, it has brought the index up to several layers of resistance.
Looking at the iShares Russell 2000 ETF (NYSEArca: IWM), we see on the daily chart that the 200-day moving average is just overhead at $120.17. We also see that a former support point in the $119.40 area could now act as resistance as well. The area served as support back in early May and briefly again in early August before the small-cap index fund crashed through the support prior to going all the way down to the $108 level later that month.
Of course, another factor in the huge rally in October is the fact that the Russell 2000 ETF has moved into overbought territory based on the daily stochastic readings, and it came extremely close based on the 10-day RSI reading.
Looking at the weekly chart, we see a few more items of note that make me believe the IWM is ready for another retreat. We see the flatline support/resistance line in the $119.50 area. The area acted as resistance last December and then acted as support in early May. The high on Friday was just shy of this line.
The importance of the $119.50 area is magnified by the fact that the 52-week moving average is currently at $119.41, creating yet another layer of resistance the ETF faces at this time.
The weekly oscillators aren’t up to overbought levels yet, but they have been climbing sharply over the last six weeks. The oscillators reached oversold levels in August, which is only the second time that both have reached oversold levels in the last 3 ½ years.
Another factor that concerns me about the IWM and the overall market is the shift in investor sentiment in recent weeks. The American Association of Individual Investors’ sentiment survey has changed dramatically in the last month, and last week’s numbers showed a bullish skew that hasn’t been seen since February.
The bullish percentage increased to 39% in the most recent survey, which is the highest bullish reading since the week of March 5. The bearish percentage came in at 18.6%, which is the first time since Feb. 18 that the bearish percentage has been below the 20% level. The ratio of bulls to bears stands at 2.1 as a result of the previously mentioned percentages, and this is the first time since February that the ratio has been above 2.0.
This huge jump in bullish sentiment is concerning from a contrarian viewpoint, and along with the various layers of resistance these factors make me bearish on the Russell 2000 ETF. I would look for a drop back down to the $110 level at the very least, and it could go down even further.
I would look to short the IWM at present levels with a target of $110 and a stop-loss at the $120.50 level.
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