3 Trading Ideas for Small-Cap Bears

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3 Trading Ideas for Small-Cap Bears

Between May and September 2018, investors poured money into small-cap equities in the United States, believing they were less vulnerable to geopolitical concerns, trade tariffs, and a higher currency. Small and mid-cap firms benefited greatly from President Trump’s tax reform proposal, which slashed the corporation tax rate from 35% to 21%.

However, small-cap stocks have lost about twice as much as large-cap equities during the last month. The Russell 2000 Index, which follows the performance of 2,000 small-cap firms in the United States, is down 9.45% as of October 22, 2018, while the S&P 500 Index, a broad proxy for large-cap equities, is down 4.82%. Technically, the Russell 2000 is presently trading below its 200-day simple moving average (SMA) as well as a multi-year trendline.

Traders who predict small-cap stocks will fall further can try betting against the Russell 2000 Index with one of these three inverse exchange-traded funds (ETFs). Let’s have a look at some trade chances.

The Direxion Daily Small Cap Bear 3X ETF, which debuted in 2008, tries to replicate the negative daily performance of the Russell 2000 Index three times. With an average daily trading volume (ADTV) of $106.46 million and an expense ratio of 0.96%, this ETF is a good alternative for traders looking to make a short-term bet against the Russell 2000. In early October, TZA’s price broke above both the eight-month downtrend line and the 200-day SMA on above-average volume, indicating more positive momentum. The ETF is now forming a pennant, which is a continuation pattern, with support at the 200-day simple moving average. Traders who enter a long position on a break above the upper trendline of the pennant at $11 should safeguard it with a stop-loss order right below the pattern’s bottom. Using the measured move strategy, a profit objective of $13.5 might be set. Traders accomplish this by adding the distance of the move before the pennant to the pattern’s breakout point ($2.5 + $11).

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The ProShares UltraShort Russell2000ETF, launched in January 2007, seeks to provide twice the inverse daily performance of the Russell 2000 Index. TWM’s ADTV of $14.07 million is smaller than TZA’s, but there is still enough liquidity for short-term traders who predict the Russell 2000 will continue to decline. The fund carries a management fee of 0.95%. TWM, like TZA, had an early October spike on heavy volume as small-cap stocks faced tremendous selling pressure. Traders should seek for an entry opportunity on a break above the upper trendline of the pennant formation around $16.5, with a stop placed just below the 200-day SMA. Profits might be grabbed utilizing the measured move strategy at the $18.75 level ($2.25 + $16.5).

The ProShares Short Russell2000ETF, launched in 2007, seeks to give the opposite one-day performance of the Russell 2000 Index. It accomplishes its goal by using ETFs and index swaps. The fund has an annual management fee of 0.95%, which is lower than the category average of 1.02%, and an ADV of $21.84 million. RWM’s chart is identical to the previous two ETFs examined, except the bottom point of the pennant pattern is above the 200-day SMA rather than on it. Traders may opt to set a buy stop-limit order immediately above the upper trendline of the pennant at $41.5 and bank profits at $44.75 ($3.25 + $41.5). A stop-loss order placed below the Oct. 16 low might be used to terminate the transaction if the price moves in the other direction.

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