What Small Cap Stocks Need to Continue Their Climb Higher

The iShares Russell 2000 ETF (IWM) finally caught a break last October after a lackluster year of underperforming the major indices.

As a reminder, IWM is an ETF that invests in 2,000 small- to mid-cap stocks.

After being down 7%, it got pulled into the market’s broader rally. And it gained 27% in just a couple of months.

We last checked in on it in mid-January (red arrow in the chart below). But at the time, IWM had sharply reversed from its late-December high as buying momentum waned.

More recently, momentum has been steadily returning in early 2024. That has sent IWM up to two-year highs.

So let’s check back in to see if it can maintain its climb…

A Chart of Three Parts

In the chart of IWM below, you can see three distinct phases in the 50-day Moving Average (MA, blue line).

First, there’s the rally up to late July. That’s followed by the retracement through late October. And finally, we see the rally up to its recent high:

iShares Russell 2000 ETF (IWM)

Source: eSignal

Each of these phases saw the 10-day MA cross the 50-day MA (above for the bullish legs and below for the bearish leg).

They also coincided with clear changes in momentum.

In the first leg, the RSI broke through resistance (green line) and tracked in the upper half of its range.

Then in the second phase, that action reversed. The RSI broke through support and got stuck in its lower band.

The bullish RSI and MA action returned in phase three. Plus, you can also see positive signs from the MACD.

In early November, the blue MACD line crossed above the orange Signal line, with both then rising past the zero line.

Then IWM’s rally hit a short-term peak.

Take another look:

iShares Russell 2000 ETF (IWM)

Source: eSignal

IWM reversed along with two bearish signals:

1. The RSI and IWM stock price diverged (orange lines). Then the RSI dropped from overbought territory (upper grey dashed line) and dipped below support.

2. The MACD line reversed and crossed beneath the Signal line with both tracking lower.

That pullback petered out after the RSI broke back above support and moved again in the upper half of its range.

As the chart shows, IWM has been grinding higher. And the RSI has still been tracking in its upper half since then.

The 10-day MA has also continued to stay above the 50-day MA, with both still trending higher.

For IWM’s rally to remain intact, though, there are several things we’ll need to see…

Positive Momentum

For a start, the current action of our two MAs has to continue.

The 10-day MA is accelerating higher and pulling the longer-term 50-day MA with it. That is key to IWM’s longer-term rally.

Plus, IWM needs to maintain positive momentum. That is being tested now as the RSI bounces along support (red circle). Previously in phase 2, IWM went into a downtrend when the RSI fell and got stuck in its lower band.

And the other thing to watch is the MACD.

After retracing from its December high, the MACD has been meandering sideways just above the zero line.

For IWM’s rally to regather momentum, the MACD line has to cross the Signal line with both rising.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict