IWM Sets Up Dual Pennant/Flag Formation – Suggesting Very Volatile Apex Event

Recently, we’ve seen an extended sideways price trend in the Russell 2000 sector that started in February/March of 2021.  The peak price level on the IWM, the Ishares Russell 2000 ETF, reached $234.29 and has consolidated in a sideways price range for more than five months now.  In mid-July, IWM broke lower and established a fresh new price low of $209.05 – setting up a second Pennant/Flagging price formation (in YELLOW).  We believe this extended sideways Pennant/Flagging price channel is setting up a major volatility event (breakout or breakdown) as the price continues to near the Apex.

Dual Pennant/Flag Setups Suggest Big Volatility On The Horizon For Traders

We’ve drawn the longer-term Pennant/Flagging channel in CYAN and the more recent Pennant/Flagging channel in YELLOW.  What we find interesting is that price is certainly attempting to break free of this channel recently but has continued to be constrained by a lack of directional momentum.

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The extended price consolidation shown on this Daily IWM chart highlights the lack of upward price momentum in the Russell 2000 compared to the continued bullish trending of the NASDAQ, S&P500, and DOW JONES.  Historically, the Russell 2000 tends to react to market strength and weakness a bit earlier than the other major indexes.  The current sideways price channeling suggests the reflation trade momentum may have already stalled out, while the NASDAQ and other major indexes continue to trend higher in a very late stage rally.

As price continues to channel toward the dual-Apex level, we believe a major volatility event will take place in late August 2021 or early September 2021 – possibly very similar to what happened in 2018 when the US Fed prompted a major downtrend in the US markets after raising rates in September 2018.  This prompted a broad market decline totaling more than -20% in most major US indexes.

Weekly IWM Chart Highlights Pending Flag Apex (Near Early September)

This Weekly IWM chart highlights the continued consolidation and recent increase in price volatility related to the extended Pennant/Flag formation setting up.  Notice how volume has continued to weaken while the recently extended price range has broadened to create the new YELLOW Pennant/Flag price channel.  We believe this is increased price volatility starting to build as price attempts to break free of the Apex channels.  Ultimately, some bigger volatility events will unfold causing the price to either break upward or downward from the $220 Apex level.

If IWM holds above $207, there is a moderately strong potential for a new bullish price trend to set up prompting another wave of upward price trending.  If that $207 level is breached to the downside, then we will have broken a recent “new price low” and that action will confirm a new price downtrend.

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Have a great day!

Chris Vermeulen
Chief Market Strategist