It's no secret the past couple days of selling have hit the iShares Russell 2000 ETF (IWM), and anything loosely associated with the momentum sector especially hard. The carnage in names like Tableau Software (DATA), FireEye (FEYE), Splunk (SPLK) and Twitter (TWTR) has been merciless. Gains that took two to three weeks to build have been forfeited in a few short days.
Given traders' current focus on all things momentum, let's take a closer look at the IWM. Before we get into the charts and a few specific levels, let's remember that the most important consideration over the next few weeks will be how the various stocks respond to their earnings reports. More specifically, we need to see how traders react to EPS, revenue and sales beats and misses. This will tell us much of what we need to know in regards to short and intermediate-term sentiment.
The most important area on the IWM, in my view, is the one between $113.50 and $115. As you can see on the volume profile chart below, $115 represents the lower end of the current composite balance (with the top coming in near $118.40). And if the bulls are going to avoid a more gut-wrenching test, they need to prevent the IWM from closing a session beneath that $115 level.
That said, I would expect higher-timeframe bulls to remain long and committed (though scared and in the fetal position) until a close beneath $113.50 is seen. A close beneath $113.50 would immediately put $111.15 and $108.50 on the table.
Adding to the bulls' current woes is the fact that we have a negative divergence on the daily IWM stochastics, and a sub-50 Relative Strength Reading (RSI).
When it comes to trading the IWM, the bottom line is that bulls need to band together above $115. Every close beneath $115 weakens their hold on the market, and gives the bears a reason to press their short bets more aggressively on any intraday bounce. As long as demand remains intact against $115, I'd be on the lookout for any short-term bounce to peter out toward $118 -- $118.40 (the top of composite balance).
As far as Wednesday's SPY trading is concerned, I believe the most important area to focus on will be $196.90 -- $197.05. Based on the volume profile below, the bears should be expected to enjoy a tailwind until the bulls manage to close a thirty-minute bar back above $197.05. Put another way, I believe all trading beneath $197.05 favors a continued slide toward $195.25 and $194.36.
- After showing a bit of promise last week, JC Penney (JCP) has slid back beneath the $9 level, and is once again threatening to close beneath its 50-day simple moving average. Due in part to the selling in the small-cap and momentum names, and in part to my lack of patience in the stock's performance over the last month, I opted to sell out of my JCP position on Tuesday. Barring some new development, I wouldn't expect to re-enter the stock until it's trading above its mid-May swing high.
- Another stock that failed to meet expectations is BioMarin Pharmaceutical (BMRN). After giving the stock several weeks to gain a more meaningful tailwind and catch up to its brethren in the rebounding biotech sector, I opted to close this position as well.
- On the positive side of the ledger, General Motors (GM) and Baxter (BAX) both continue to chug along at a respectable enough pace. That said, any hint that the recent weakness is spreading from momentum and small-cap stocks to more large-cap names will have me selling first and asking questions later. For the time being, I am measuring BAX against its 50-day simple moving average and GM on its continued ability to close above $37.
- A recent addition to my long radar was Sears Hometown and Outlet Stores (SHOS). With a trigger level of anything above $22 (on a closing basis and preferably on volume above 250,000 shares), I will scratch this name off my list on any close beneath $20. In fact, a close under $20 would probably have the bears licking their chops.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at firstname.lastname@example.org or posted to my twitter feed @ByrneRWS