After 'Astonishing' S&P 500 Streak, Small Caps Poised for Next Breakout

The market managed to shake off Moody’s downgrade of U.S. debt. A gap down was followed by a close near the highs for the broader market. The S&P 500 and the Nasdaq 100 continued six-day winning streaks. Granted, we’ve inched higher in the past four days, but the move off the April low has been nothing short of astonishing.

When the Invesco QQQ Trust QQQ flirted with $400 on April 7, people would have thought you were crazy if you told them it would be trading above $520 six weeks later. And we didn’t have any solidified trade deals or favorable monetary policies during that period. We have promises of trade deals, proposals and soft agreements, but everything appears fluid right now. I’d even call some of the deals tenuous, at best.

Although they haven't enjoyed six straight days in the green, small caps are trying their best to jump into this rally. While large caps are pressing highs, the iShares Russell 2000 ETF IWM appears poised to stage its own breakout.

On Monday, IWM closed two pennies shy of its 200-day exponential moving average (EMA). IWM last traded above its 200-day EMA during the last week of February. Once the 200-day EMA failed to hold as support, IWM broke down to its April low, a 20% drop.

The action over the past week has created a bullish consolidation channel. IWM has risen consistently along a rising support line. Now, that rising support is about to intersect a long-trending resistance line. And all of it is coming together right at the 200-day EMA.

Current momentum favors a continued breakout, but significant consideration needs to be given to the possibility of a big move in either direction. Volatility may be the higher probability play. On a close above the 200-day EMA, should trigger a quick rally of $10 to $15. If we close below $205 on consecutive days, then I would step aside on a long and watch from the sidelines.

At the time of publication, Byrne had no positions in any securities mentioned.