Small caps: at risk of bearish island reversal
The weekly chart in the iShares Russell 2000 ETF (IWM) gapped up above last week's close. If for some reason it should gap down after the long weekend on Tues. 2/16/21, BEWARE! It will constitute a bearish island reversal. This is when two different gaps isolate a cluster of trading days. (which is best observed on the daily chart, but I have shown the weekly here for added perspective).
Gains in small caps have far outpaced the major indices in recent months, which means that IWM has had less opportunity to establish strong downside support should it fall. IWM must fill its gap through intra-day price action, and ideally soon, if it wishes to continue advancing in a healthy manner -- or else the gap will become like a magnet during significant drops, as 90% of all gaps are (eventually) filled.
So, if you wake up on Tuesday morning and we have gapped down below the previous week's open, I would suggest selling or at least taking some off the table. Daily RSI is 72 and weekly is 75, so it is already a bit overbought. Potential support levels will be best identified through the daily chart - possibly at the 50 or 200 MA's, or at the psychological round number of 200.
Read more about island reversals here: https://www.investopedia.com/terms/i/islandreversal.asp
Gains in small caps have far outpaced the major indices in recent months, which means that IWM has had less opportunity to establish strong downside support should it fall. IWM must fill its gap through intra-day price action, and ideally soon, if it wishes to continue advancing in a healthy manner -- or else the gap will become like a magnet during significant drops, as 90% of all gaps are (eventually) filled.
So, if you wake up on Tuesday morning and we have gapped down below the previous week's open, I would suggest selling or at least taking some off the table. Daily RSI is 72 and weekly is 75, so it is already a bit overbought. Potential support levels will be best identified through the daily chart - possibly at the 50 or 200 MA's, or at the psychological round number of 200.
Read more about island reversals here: https://www.investopedia.com/terms/i/islandreversal.asp
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