Sizing Up the Russell 2000

 | Mar 05, 2012 | 10:00 AM EST  | Comments
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IWN

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If you look at the weekly and monthly charts of most of the major indices, you can clearly see the potential for a continued rally -- if you're using my methodology, at least. Keep in mind that I am talking about the bigger-picture, meaning a healthy downside correction on the daily charts would be welcome whenever the markets are ready to provide one.

Actually, the Russell 2000 is the first of the major indices that is starting to correct to the downside a bit, and that is where I'm focusing today. Let's start with the weekly chart on the iShares Russell 2000 Index Fund (IWN). On this chart, as long as the October 2011 lows are not taken out, the potential upside targets that stand out to me are $94.08 and $99.06 to $99.74, as illustrated below.

IWM -- Weekly
Source: Dynamic Trader

If the October lows are taken out instead, I'll have to question or reassess my longer-term view. Now that you have an idea of what the bigger-picture parameters are suggesting, let's take it down to a daily chart and see what that says.

IWM -- Daily
Source: Dynamic Trader

I consider the most recent high in the IWM to be pivotal for a couple of reasons. The first is that it was made on top of a 100% price projection of a prior rally swing that comprised a climb of $16.88. This gave us a level of $83.50 to watch for possible resistance. The actual high was made at $83.31, which was just short of this projection, meaning the most recent swing, at $16.69, was similar.

Second, there was another key resistance decision that was calculated from the major swing of the Oct. 27 high to the Nov. 25 low (a swing of $10.35). The 1.618 Fibonacci extension of this swing came in at $83.37. So the $83.37-to-$83.50 level was a major resistance decision,, and the actual high came in at $83.31, which was just short of this key area.

This high was finally followed by at least a short-term pattern of lower lows and lower highs. This has given shorter-term traders a reason to consider the short side. In the bigger picture, however, longer-term traders can look at this as an opportunity to enter the buy side at some cheaper prices.

The areas I will start looking at for a possible entry come in at $78.45 to $79.57, $72.96 to $76.05 and $68.96 to $70.19. These are all relatively wide zones, and to refine an entry you need to see whether the general area holds, then watch for reversal indications on something like a 30-minute chart. For more information on how to trigger into a trade using the lower-time-frame charts, please refer to my prior article on trades and triggers on ETF Profits.

IWM -- 60-Minute
Source: Dynamic Trader

If you are more oriented toward the shorter term, take a peek at the 60-minute chart below, on which I've illustrated a couple of key price decisions. If you are longer-term-oriented, the daily and weekly charts should be of more interest to you.

If you have any questions, feel free to post them in the comments below.

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