IWM: The most interesting chart in the world:
As of Friday (Jan 21) IWM has fallen out of a long range of distribution, produced both daily and weekly closes outside the trading range, and importantly has the potential to produce a large move. In this piece we discuss the trading range, mostly from a Wyckoff perspective, show multiple ways to start thinking about how far the move might progress, and finally take a look at IWM in terms of its strength relative to the higher quality SPX.
Again, there is not a trading recommendation attached to these observations. The CMT course offers an excellent way to learn more about the concepts discussed below.
1) The most important chart feature is the trading range. Long trading ranges represent zones where supply and demand move into balance.
a. Ranges are zones where strong hands / smart money accumulate new shares if they are bullish, or distribute existing shares if they are bearish.
b. In early November price attempted to break out of the top of the range, but failed. In Wyckoff terms this is known as a terminal upthrust. The failure is bearish and confirmed the view that the range represented distribution.
c. The upthrust was followed by a high volume decline back to the lower bound. The volume expansion and solid thrust strongly suggested that price was likely to break out of the trading range.
d. There was some buying as the market tested the bottom of the range for the last time (note the very low volume bounce). My interpretation is that traders who had repeatedly bought the trading range lows, tried to buy again. They failed to recognize the significance of the upthrust and of the development of high volume in the days just prior. Now they are trapped.
2) On Friday, price fell through the range lows, trapping longs and accelerating lower on high volume.
3) Was the volume high enough to exhaust the immediately available supply? I would think not. Modern selling climaxes often take multiple days to unfold, and are not likely to occur this soon after falling out of a long zone of distribution. Remember, the long range attracted many weak handed buyers who are now being forced to liquidate.
Targets:
1) There are several ways to think about move objectives. The simplest is to run a Fibonacci retracement of the March 2020 low to the November 2021 high. I keep it simple. I look at .382, .500 and .618.
2) Note that the 50% retracement of the entire move is very close to the January 2020 high pivot. The two form a support confluence in the 169 zone. Given the amount of distribution that occurred in the trading range, I think its more likely that the .618% retracement @ 152 is the most likely one.
3) When a correction develops you will be able to use the TradingView trend based Fib extension tool to project additional targets. Its likely that those targets, combined with the retracement tool and more traditional chart analysis will provide support confluences to work with.
Point and Figure charts also provide insight. They don't get nearly the respect of Fib points, but they deserve it. I tend to use the Fibo points as my references, but sometimes, a solid PF range count can add insight.
Wyckoff and others taught that the length of time spent in the consolidation is related directly to the distance of the subsequent move. Trading ranges are areas of the chart where large amounts of shares change hands, often from strong hands to weak hands. This is why there is a relationship between the length of the range and the size of the move.
1. Granted, there is no end to the debate as to what points should be used to define the counts. Since I'm a simple guy, I keep it simple.
2. In this case the width of the range is notable. A conservative target falls in the 145 area while a more aggressive accounting measures as deep as 121.
So I have targets, what do I do now?
1. I think its enough to know that the targets are all much lower. As the trade progresses the chart will produce more support and resistance zones, target and objectives that will help to narrow the range of outcomes.
2. The final point is that, particularly in the case of point and figure charts, objectives are more guides than they are precise points. When available P&F counts are extremely useful in determining risk/reward in a trade.
In the shorter run, the market broke out of its trading range on Friday with a solid daily/weekly thrust lower. But now, in the shortest perspectives it is deeply oversold. If the market does rally, the character of the rally is likely be corrective. I like to look for bear flags or pennants or a rally back to the underside of the broken trading range before the market rolls over again.
Final Point: I was always taught to buy the strongest names/groups in uptrends and to sell the weakest names/groups in downtrends. IWM has clearly been weaker than SPX for a number of months. The top panel is IWM, the middle panel is the SPX and the bottom panel is the ratio between the two. If the market is setting up a major correction IWM probably will be far weaker than SPX.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
Again, there is not a trading recommendation attached to these observations. The CMT course offers an excellent way to learn more about the concepts discussed below.
1) The most important chart feature is the trading range. Long trading ranges represent zones where supply and demand move into balance.
a. Ranges are zones where strong hands / smart money accumulate new shares if they are bullish, or distribute existing shares if they are bearish.
b. In early November price attempted to break out of the top of the range, but failed. In Wyckoff terms this is known as a terminal upthrust. The failure is bearish and confirmed the view that the range represented distribution.
c. The upthrust was followed by a high volume decline back to the lower bound. The volume expansion and solid thrust strongly suggested that price was likely to break out of the trading range.
d. There was some buying as the market tested the bottom of the range for the last time (note the very low volume bounce). My interpretation is that traders who had repeatedly bought the trading range lows, tried to buy again. They failed to recognize the significance of the upthrust and of the development of high volume in the days just prior. Now they are trapped.
2) On Friday, price fell through the range lows, trapping longs and accelerating lower on high volume.
3) Was the volume high enough to exhaust the immediately available supply? I would think not. Modern selling climaxes often take multiple days to unfold, and are not likely to occur this soon after falling out of a long zone of distribution. Remember, the long range attracted many weak handed buyers who are now being forced to liquidate.
Targets:
1) There are several ways to think about move objectives. The simplest is to run a Fibonacci retracement of the March 2020 low to the November 2021 high. I keep it simple. I look at .382, .500 and .618.
2) Note that the 50% retracement of the entire move is very close to the January 2020 high pivot. The two form a support confluence in the 169 zone. Given the amount of distribution that occurred in the trading range, I think its more likely that the .618% retracement @ 152 is the most likely one.
3) When a correction develops you will be able to use the TradingView trend based Fib extension tool to project additional targets. Its likely that those targets, combined with the retracement tool and more traditional chart analysis will provide support confluences to work with.
Point and Figure charts also provide insight. They don't get nearly the respect of Fib points, but they deserve it. I tend to use the Fibo points as my references, but sometimes, a solid PF range count can add insight.
Wyckoff and others taught that the length of time spent in the consolidation is related directly to the distance of the subsequent move. Trading ranges are areas of the chart where large amounts of shares change hands, often from strong hands to weak hands. This is why there is a relationship between the length of the range and the size of the move.
1. Granted, there is no end to the debate as to what points should be used to define the counts. Since I'm a simple guy, I keep it simple.
2. In this case the width of the range is notable. A conservative target falls in the 145 area while a more aggressive accounting measures as deep as 121.
So I have targets, what do I do now?
1. I think its enough to know that the targets are all much lower. As the trade progresses the chart will produce more support and resistance zones, target and objectives that will help to narrow the range of outcomes.
2. The final point is that, particularly in the case of point and figure charts, objectives are more guides than they are precise points. When available P&F counts are extremely useful in determining risk/reward in a trade.
In the shorter run, the market broke out of its trading range on Friday with a solid daily/weekly thrust lower. But now, in the shortest perspectives it is deeply oversold. If the market does rally, the character of the rally is likely be corrective. I like to look for bear flags or pennants or a rally back to the underside of the broken trading range before the market rolls over again.
Final Point: I was always taught to buy the strongest names/groups in uptrends and to sell the weakest names/groups in downtrends. IWM has clearly been weaker than SPX for a number of months. The top panel is IWM, the middle panel is the SPX and the bottom panel is the ratio between the two. If the market is setting up a major correction IWM probably will be far weaker than SPX.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
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