Short The Small-caps

JC Parets
May 25, 2021

They say that you shouldn't kick someone when they're down. But in the markets, that's actually the best time to kick them, when they're already down.

We call that "Relative Weakness". When we're shorting stocks, those are the ones we're looking for.

In the case of Small-caps, they've been a heads up of a problem in the stock market since almost 3 months ago. They suggested stocks would struggle and would go sideways, at best.

And that's exactly what we've seen. Many stocks and sectors going sideways, and a bunch of them going down.

BUT, if we're going to go from Bad to Worse, then Small-caps are most likely the ones getting hit the hardest. 

You can see in these breadth numbers that the internals in Small-caps have not been improving, they've actually been getting worse.

Take a look at the Small-cap Russell2000 Index ETF $IWM. Looks like a top to me doesn't it?

If we're below 216, we want to short the hell out of it:

But let's remember why 216 is such an important level. That's the key 161.8% Extension of the entire Covid Crash, top to bottom. This is a critical price level for Small-caps.

As always, we better be sure before we "short the hell" out of anything, not just small-caps. Because we know very well that, "From Failed Moves, Come Fast Moves" in the opposite direction.

So we don't want to get caught short in one of these either:

So 216 is the level. We can't be short if we're above that.

Why not retest 170? I don't see why not.

That's a nice risk vs reward here.

I like it.

We talked about this trade and the rest of what's going on in the market on our Live Monthly Conference Call last night. Premium Members can watch it in full and download the slides here.

 

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