Hey Traders, Raghee here.
In this trade breakdown we’re gonna jump into a previous trigger in the Russell.
We’ll also take a look at the IWM Russell ETF. Then I want to talk about this same setup that happened about three sessions ago and what that looks like. It’s in a very similar area…
So let’s jump right into it.
So first of all, coming right out of the last week of February, all eyes are on the yield curve. The chatter is mostly about bonds and the steepness of the yield curve. This is what’s basically used as an indicator of the market’s expectation for inflation.
And so, despite the Feds comments and testimony at the Humphrey Hopkins bi-annual senate banking committee, the bond market is basically communicating the steepness of the yield curve. The bond market is indicating that the long end of the yield curve is what dictates mortgage rates and longer-term loans.
That’s when the market perceives the Fed is going to lose control of. Again, think about the effects of things like housing.
Looking At The Russell…
One of the things that a lot of traders do, including myself, is we look at the yield curve between the 10 year treasury note and the three month T bill. It sort of projects what the steepness of the curve can be. In a way, it’s sort of frontrunning longer-term yields like the 10 and the 30.
Now why do I bring all of that up as we’re taking a look at the Russell? Interestingly enough, the tendency is that when we see this yield curve or this spread, it benefits the Russell.
So, you’ll see this relative outperformance in small cap, and I believe that’s what we’re seeing. Then within discussion about yield curves, you realize that there’s a certain macro support to the relative outperformance in the Russell. It’s not just that small caps are relatively outperforming the NASDAQ and the S&P especially but now we know a big part of the “why”.
Now, Do We Wanna Buy?
Lets now slip back into the technicals. A previous buy zone in here, in here, and here we are once more.
So, the most recent trade was this dip into the 34 EMA wave. That dip we saw into the 34 EMA wave is very similar to this one. We just look for that market to kind of rally out of the wave and move higher.
Now, we did do that, it was a very quick move and we got right back up to the swing high that was left right here which is also a minor high. A lot of times people overlook a level like this as a potential target. This is because it just doesn’t look like that much room to run. It didn’t take very long, and most of the time, people want to see new highs. However, tactically for a first target, this is a huge error.
Why The Russell?
So we look at the recent swing high that preceded the pullback. Once again, here’s your pullback, the same macros are in play and here is your swing high waiting. That’s all we’d want to expect for that T1 (or first target).
You can see this is the second time we’re basically doing the same exact trade bouncing out of the wave. This gives you a little bit of a macro economic background as to why the Russell. This also gives you what this setup is technically, and allows you to not expect new highs right away but to just play to the swing high.
That’s the breakdown in RTY.
Now this is going to play out similarly on the IWM. You can see two dips and this is where you can buy “at the money” calls. You don’t need a lot of time to see this market bounce.
In fact, if you wanted to buy the following Friday expiration on the dip, I think that’s perfectly fine. Not that this is a day trade but I also don’t expect that it’s going to take more than a few days to shake out. We’ll either be either proven right and we revisit the swing high, or we’re proven wrong by breaking the 34 EMA on the low. Alright I hope that helps! Russell macro bonds all wrapped in one neat little trade.
