Small-Caps Could Stall This Options Expiration Week

The Russell 2000 tracker enters a holiday-shortened expiration week just below peak call open interest

by Bernie Schaeffer

Published on Apr 16, 2019 at 7:01 AM
Updated on Apr 16, 2019 at 7:01 AM

It was a flattish performance last week for the iShares Russell 2000 ETF (NYSEARCA:IWM), which tracks the small-cap Russell 2000 Index (RUT), as caution about the pace of global economic growth put a damper on buying interest for the sector. But April so far has been fairly bullish for IWM, as evidenced by its month-to-date gain of 3% as of Friday's close.

More concretely, the exchange-traded fund (ETF) has convincingly taken out its 200-day moving average (in red on the accompanying chart), with Friday marking the third consecutive daily close atop this trendline, and its fifth in the last six sessions. This is IWM's most convincing breakout above its benchmark 200-day moving average since this trendline was first breached back on Oct. 10, and it follows a harsh rejection here following a late-February/early March test of this resistance, back when the 200-day was hovering around $158.

Roughly coincident with the 200-day is a descending trendline (in green) connecting IWM's series of lower highs dating back to late August, including the peaks set during that last unsuccessful incursion on the 200-day in February and March. The ETF rallied above this trendline on April 5 -- the same day the shares bounced through their 200-day moving average -- and the outcome of a retest here a couple of days later was encouraging, as IWM moved sharply higher on April 10.

Somewhat less encouraging, in the immediate days ahead, is the accumulation of 99,986 calls at the April 158 strike, which lies immediately overhead. This represents peak call open interest for the soon-to-expire series, and data from the major options exchanges highlights a mix of buying and selling activity at this strike.

This raises the prospect of IWM encountering options-related resistance at $158 through the end of this holiday-shortened week -- particularly with a number of other notable price points clustered near Friday's close at $157.68. That "cluster" includes the Nov. 7 close at $157.41, the Nov. 8 intraday high at $157.90, the March 1 year-to-date weekly closing high of $158.24, the April 2018 intraday high of $158.38, the Oct. 16 close at $158.64, and a round 20% year-to-date return at $160.68.

And while (all other things being equal) this setup would seem to indicate a temporary IWM "stall" in the short term more so than an all-out plunge or correction, it's interesting to note that front-month put players have focused their attention on the relatively deep out-of-the-money April 150 strike, which is home to 74,844 contracts. Data from the top options exchanges reveals a strong skew toward buyer-driven activity here, which means there is the possibility for this strike to exert a "magnetic" pull on IWM in the event of heavy selling.

That said, a move south of IWM $150 over the next four days would be truly shocking, given this area's credentials as support. In addition to $149.60 marking a 50% retracement of the fund's decline from its Aug. 31 intraday high to its Dec. 26 intraday low, it's also home to the gently upsloping 100-day moving average (in blue), which most recently helped contain the late-March slide.

iwm daily chart 0412

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, April 14.

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