The small-cap rally is far from done, says Todd Gordon of TradingAnalysis.com, who argues that the charts point to even more gains for the group tracked by the Russell 2000.
“The Russell has been rallying sharply based on anticipated domestic policies that might be put through, namely tax reform, which would benefit small-caps the most,” he said Tuesday on CNBC’s “Trading Nation.” “So we’re seeing a little bit of resurgence here.”
To determine how high the Russell 2000 could rally, Gordon looks at the Russell-tracking IWM ETF. He says that the current consolidation in IWM could actually see a repeat of the last time there was a pullback. Essentially, Gordon points to a slight pullback in IWM at the beginning of September and says the slight drop in IWM at the beginning of this month mirrors the distance of the first.
This “symmetry” leads Gordon to believe that IWM is “ripe for a trade.” In fact, Gordon sees the IWM heading up to $152 if it were to repeat its moves in September.
As a result, Gordon is buying the Nov. 3 weekly 150-strike calls and selling the Nov. 3 weekly 152-strike calls for a total cost of about 78 cents, or $78 per options spread. The $78 paid for the trade is Gordon’s maximum risk, which he could lose if IWM closes below $150 on Nov. 3 expiration. But if IWM were to close above $152 on Nov. 3, then Gordon would see a maximum reward of $122.
However, to prevent the possible $78 loss, Gordon picks a certain level at which to stop out of the trade. He sees “support” at the IWM’s recent breakout point at $148, and says he will absolutely exit the trade if IWM drops below that point.
“If we were to break back below that level, I want to get out of this trade, contain my risk,” he explained. “Otherwise if that support holds, we should be able to reach up to around $152 in IWM.”
IWM is currently up 10 percent year to date, seeing a big rally back in August amid whispers of tax reform.