Short IWM (RUT) at 173.10, PT at 156.10

Updated

Hypothetical Trade Summary: Shorting (Russell 2000) here at 173.10. Price target at 156.10. Stop = 178.10. Capital risk = $3,000 (3% of a 100K trading account). Maximum profit = $10,200. Reward to Risk: 3.4 / 1

Rather than a legitimate rally based on an intermediate-term trend reversal, today's short squeeze appears to be about dealers and market makers (MM) unwinding hedges from a substantial OpEx puts expiring this Friday, June 15, 2022. (Unwinding hedges means dealers / MM's buying to cover short securities / futures / equities used to hedge short put positions from puts sold to traders and institutions that expired today, monthly options expiration.) IWM, an index ETF that tracks the Russell 2000, is stalling at its 21-day EMA. Moreover, the overall structure of the rally the past several days appears to be an Elliott Wave (EW) triangle pattern in most major US indices.

In EW theory, a triangle pattern is considered a corrective pattern. It tends to resolve in the direction of the larger trend, which remains downward in this case.

The Elliott Wave rules / guidance explains that "at least two of the alternate waves [in a EW triangle] are typically related to each other by .618 [Fibonacci proportion]. Assuming a triangle pattern here for the corrective bounce off mid-June 2022 lows, at least two or more of a triangle's alternating waves have Fibonacci relationships of .618.

In the chart below, the most recent bounce into today (the rally starting from the June 14 low at 167.02) is viewed as a wave E of the triangle pattern.
Applying this Fibonacci and EW guidance, one should multiply wave C's length by .618 (wave C x .618) and then project this length from the start of wave E off yesterday's lows.
This Fibonacci relationship has been applied to wave C and E, which are considered alternating waves, in the chart below.
Interestingly, the .618 relationship results in a possible end point for wave E at the .618 level where wave E = .618 x wave C. This level lies at 173.35.

This .618 relationship between the triangle's alternating waves E and C shows where IWM stalled today in its sharp rally off June 14 lows. IWM stalled at 173.34, one cent below 173.35. See chart below.

Credit is given to another TV member, MiserableToppings, who pointed out this triangle pattern last week on one of his charts using EW analysis on a different US index ( ).

DISCLAIMER: This is a hypothetical short trade using TV's short-position calculator. This idea is solely for educational / entertainment purposes and does not constitute financial advice or an investment recommendation and cannot account for any person's particular financial circumstances. I would never want other investors / traders to lose money by relying *solely* on this idea rather than doing their own due diligence. Before entering any trade, please evaluate the risks of (i) the instrument / security being traded, (ii) the type of trade and its timeframe, (iii) risks inherent in that type of trade and its time frame, (iv) the inherent risks of shorting securities (presenting unlimited risk without hard stops in place), (v) the inherent risks of trading options, leveraged ETFs, and cryptocurrencies, and (vi) all financial risks arising each person's personal financial circumstances.

Note

One additional Fibonacci level is shown in the chart below. This Fib level = 173.18. This is the .618 R of the July 8-14 swing high to low. It appears very close to the Fibonacci level derived from triangle-wave relationships discussed above at 173.35. And the purple line is the .382 Fibonacci R of the larger swing high to low from June 8-16. This appears to be a Fibonacci cluster, which Fibonacci experts cite as an area of greater importance in terms of support / resistance on a price chart.

Trade closed: stop reached

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