Time to Long IWM? Is it time to long IWM after today's bul run?
To get to the point, IMO, No.
Here is my analysis and plan with IWM:
Fundamentally:
Some of the biggest stocks with the most growth of 2021 were small cap stocks, which IWM tracks.
These are the stocks that are being hit the hardest with this market correction. *cough* AMC *cough*.
Historically:
IWM has surpassed SPY and DIA in correction/sell off during rough market times.
It has lost between 64% on the high end and 24% on the low end in these market down turns (looking at data from 2008, 2018, COVID).
From its ATH high in November, we are currently at around 22% (rounded up). There is a possible 2% to 44% left of correction.
Chart Trend:
Obviously, we are in a down trend. (No! Really?! ;) )
SPY and DIA are appearing in a flattened, pancake pattern (usually indicating an impending aggressive move coming). However, ARKK and IWM have re-established the bearish flat top indicating a strong down-trend, even after today's EOD bull-run.
Mathematical Modeling:
IWM has been on-point in regression analysis these past 2 weeks.
Today, regression models I have made of IWM predicted a possible low of 189.06 (with SD=9). We made a low of 188.09, a 0.97 point difference and well within the SD variance.
I had predicted a possible high of 193.58 (SD=9), with an actual high of 195.31, a 1.73 point difference and well within the SD variance.
Even after adjusting the model with today's variables, the model still predicts a continuation of lower highs and lower lows in the coming week.
Furthermore, there has been no invalidation of the regression model, even with the bull run at EOD. The stock still performed within accepted limits of the regression model. For an invalidation to have occurred, the stock would have to have at least tested 201.58 on the high end or 180.06 on the low end. This would indicate a change in sentiment and a call to re-look at the stock's behaviour. This was not the case today.
Probability:
I don't like communicating probability to other people, I simply use this as my own gauge to set realistic price targets. But I will share my thoughts,
The probability favours a move to the upside here. However, keep in mind that probability in trading is highly biased. Its biased because it does not take into account time (so there is generally a favourable probability to the upside vs the downside, but no indication of when that is and this is true for truly any stock, stocks in general are long biased).
The other bias is that this data is based only on January data and probability favors where most values fall. In this case, most values fall above 200 points for January and thus, as far as probability is concerned, there is more likely a chance of reaching a value in the 200s because that is where most values fall.
Yet still, probability is a powerful tool (IMO) to use and its worth mentioning. The probability that we reach a value between 196 and 200 is roughly 5%.
However, the probability we have a low of less that 200 points is actually fairly high by trading standards, its 27.45%. Not bad!
Possible outcome next week:
The market wants to make a big move. I mean, those of you who actively trade in the market every day can see it. With these huge bull runs followed by huge bear runs, this bouncing everywhere, the market is itching to make a huge move in some direction.
Heikin Ashi on DIA and Spy are pancaking indicating a build up and desire to break out in some direction.
LR Forecasting for Monday are positive, with slightly higher highs than today. However, this is followed by a decline in highs and lows with a move to the downside.
In the past, during sustained selling off, IWM likes to do bounces on the way down that stretch about 8% on average. So it may not be unreasonable to observe a bounce in the market tomorrow. This would put IWM at a price of around $204.
From there, it is possible we go lower. Much lower.
Forecasting shows lows could be as low at 175 next week (however, I never trust data more than 1 or 2 days out, without correcting with previous day data, so I would wait for Monday data before doing anything with this information).
My Outlook:
I tend to be short biased.
I am going to be looking for a break of 196.07 with good volume and bullsih appearance on hekin ashi to POSSIBLY go long up to around 200.
I will be looking at around 200-204 (if we do that high) to short, provided I see this in the price action.
I think we need a bit of a bounce to stabilize the market. The RSI on IWM is stabilizing out from being oversold to being in an area where it could make a bit of a move lower.
To be honest, I have no idea where we are heading. I tend to think we are heading to the short side. If I have to put money on it, I would bet the short side. However, I am not swinging any position period in this current market. My trades are intraday and that's it (aside from a short position I currently hold with BA).
Today I played IWM on both the short and the long side. And plan for that to be the case next week as well.
DISCLAIMER:
Not financial advice. Not a financial advisor. Just an ex-epidemiologist who enjoys mathematical modeling.
At the end of the day, I trade price action. I use regression analysis to plan my entries and exits and chart support and resistance levels (I find it more accurate than looking at the chart). However, its not always correct and I am sometimes wrong.
Manage your risk! Its okay to be wrong, and you will be wrong, just manage your risk and you will live to see another day. Its not the end of the world :).
My linear regression models are done in SPSS. I can't share pictures, but am happy to answer your questions.
Have a great weekend!
