EU News Digest Latest News & Updates
The U.S. markets are reeling, and it’s about to get worse for one group of economically sensitive stocks.
The Dow, S&P 500, Nasdaq and Russell 2000 are on track for their worst weekly losses in about two years, according to Todd Gordon of TradingAnalysis.com, who says the charts are pointing to more pain for the small-caps.
“We’re seeing some pretty good weakness in these small-caps,” Gordon said Thursday on CNBC’s”Trading Nation.” “They have the ability to really flush down.”
Gordon noted that amid the market’s wild swings, the Russell 2000 appeared to show the greatest amount of weakness. The small-cap index is down more than 3 percent year-to-date, while the Dow and S&P are both down around 2 percent.
How far could small-caps fall? To determine an exact level, Gordon draws a trendline from IWM small-cap ETF’s 2009 lows, with the line ending at around $125. Since IWM was trading at around $147 on Thursday, this means that IWM could potentially see a 15 percent plunge from current levels.
But since there’s a way to go before IWM would hit $125, Gordon wants to look at another key technical indicator before determining that IWM could plunge that low. He draws a line connecting the lows from 2016 and points out that with the recent fall, IWM has actually broken below trend, an occurrence that could serve as a warning sign for small-caps.
“We came back on the bounce, we’ve retested this resistance,” he explained. “I think that’s going to be the catalyst that gives us a potential push down on our decision point of $125.”
For a shorter-term trade on IWM, Gordon wants to buy the Feb. 23 weekly 145-strike puts and sell the Feb. 23 weekly 140-strike puts for a total cost of 81 cents, or $81 per options spread. This means that should IWM close above $145 on Feb. 23 expiration, then Gordon would lose the $81 he paid to make the trade.
But should IWM close below $140 on Feb. 23, Gordon could make a maximum reward of $419.
The IWM was down more than 1 percent on Thursday.
