The Russell 2000 Small Cap Index was the worst performer of the major market indices over the last six months. While it was up 3.5%, the Nasdaq was up more than 12%, the S&P 500 was up more than 7%, the Dow Jones Industrial Average was up nearly 8% in that time frame. The underperformance was significant, but the technical indicators suggest that dynamic may be about to change, and it could mean potentially strong upside for the small caps over the intermediate term.

A cup-and-handle pattern has formed on the daily chart of the iShares Russell 2000 ETF (IWM) , and rim line resistance going back to April is currently being tested. The base of the pattern formed just above six-month support in the $133.50 area, and the handle portion formed above the 50-day moving average and below $142.00 resistance. Daily moving average convergence/divergence is overlaid on a weekly histogram of the oscillator, and is just moving over its centerline on both time frames, and the stochastic indicator bounced off its center line and is tracking higher in its upper range. These readings reflect the improving price momentum.

Chaikin money flow is in positive territory and the accumulation/distribution line is moving higher and above its signal average, suggesting renewed buying interest in the small-cap sector.

The cup-and-handle pattern projects a price objective measured by taking the height of the pattern and adding it to the rim line. A confirmed breakout targets the $150.00 level or an approximate 6% move from its current level. 

It doesn't look as if it will happen today, but if the IWM makes another move toward the rim line, it would be a buy after an upper candle range close above $142.00, using a position size that allows for a trailing stop under the 50-day moving average, which is currently in the $139.00 area.

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

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