Yesterday, I touched on some of the things I saw on the S&P 500 Index (SPX), from a technical point of view. This morning, I want to check in on the small caps. The iShares Russell 2000 Index ETF (IWM) is an ETF I follow closely, and I like to use it as a gauge for the overall market, as well.

Ever since the IWM broke below the neckline of the head-and-shoulders reversal pattern, it has been in a volatile trading range. The target for this pattern is actually down around $72.50, but the $76 area was a level I was expecting to act as potential support.

One of the interesting developments has not been how precise this $76 level has held, but the potential pattern that is forming when you zero-in on the chart. As you can see below, a potential inverse head-and-shoulders pattern is forming on the IWM. Also note how its neckline is very close to the former neckline of the pattern we just broke below.

The recent price action also represents a bullish island reversal pattern, which can be seen more clearly on the daily chart above. Shown within the green circle, this pattern is formed when an exhaustion gap (June 1) reverses and is quickly followed by a breakaway gap in the opposite direction (June 6). Furthermore, the daily MACD histogram also turned positive on June 7, and has broken above a descending trendline that defined previous lower highs. I am encouraged by these recent technical developments, but the real test for the IWM will be breaking above the $78-$79 area that has been previous support and resistance in the past.