Book Profits on Small-Caps as Russell 2000 Nears All-Time High Ahead of FOMC

NEW YORK (TheStreet) -- The iShares Russell 2000 ETF (IWM) represents the Russell 2000 and has a positive weekly chart. Here's what to look for as investors await the Federal Reserve's Open Market Committee Policy Statement Wednesday afternoon and the press conference by Fed Chief Janet Yellen that follows.

Of interest at the press conference is whether or not Janet Yellen comments on equity valuations. Keep in mind that in early May the Fed Chief made remarks that equity-market valuations were generally quite high. If investors agree that there are "potential dangers," it's time to book profits in small-cap stocks, as the Russell 2000 exchange-traded fund has a price-to-earnings ratio of 18.96.

The consensus about the FOMC meeting is that the Federal Reserve will hint that the first hike in the federal funds rate will follow the Sept. 16 to 17 FOMC meeting. The Committee will also likely suggest that additional hikes will be data-dependent.

Given elevated valuations and potential higher interest rates, Investors should reduce allocations to small-cap stocks by at least 50%. If exposure is desired, trade the iShares Russell 2000 ETF. Here's how.

Here's the daily chart for the Russell 2000 exchange-traded fund.


Courtesy of MetaStock Xenith

The Russell 2000 ETF had a close of $126.42 on Tuesday, just below its all-time high of $127.13, set on April 15. Notice how this ETF had been trading back and forth around its 200-day simple moving average between April 14, 2014, and Dec. 16, 2014, and has been above this moving average since 2015. The 200-day was tested as technical support three times between Jan. 6 and Feb. 2.

As the FOMC continues on Wednesday, the ETF is above its 50-day and 200-day simple moving averages of $124.48 and $118.91, respectively.

Here's the weekly chart and analysis for the Russell 2000 ETF.


Courtesy of MetaStock Xenith

The weekly chart for the Russell 2000 is positive, with its ETF above its key weekly moving average of $124.80. The momentum reading is projected to rise to 70.19 this week, up from a reading of 64.08 a week ago on June 12. Note that the small-cap index has been above its 200-week simple moving average since the week of Oct. 14, 2011, when this average was $65.17. Today this "reversion to the mean" is $98.81.

Investors looking to buy the Russell 2000 ETF should place a good till canceled limit order to purchase the ETF if it drops to $117.17, which is a key level on technical charts until the end of June.

Investors looking to book profits should place a good till canceled limit order to sell the stock if the ETF rises to $131.65, which is a key level on technical charts until the end of June.

Investors not familiar with technical analysis should begin with the notion that a price chart for a stock shows a road map of past price performance, which provides guidance for predicting future share price direction.

Here's how to read a daily chart. There are two moving averages to follow: the 50-day simple moving average is in blue while the 200-day simple moving average is in green.

Here's how to read a weekly chart. This chart shows weekly price bars going back to the beginning of 2007 and thus includes the Crash of 2008, then the current bull market for stocks that began in March 2009. The red line tracks the ups and downs of the key weekly moving average. The green line is the 200-week simple moving average. The red line that oscillates along the bottom of the chart is the momentum reading on a scale of 00.00 to 100.00. A reading below 20.00 is oversold and a reading above 80.00 is overbought.

A technically positive weekly chart occurs when a stock ends a week above its key weekly moving average with the momentum reading rising above 20.00.

A technically negative weekly chart occurs when a stock ends a week below its key weekly moving average with the momentum reading declining below 80.00.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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