How To Profit From Increasing Relative Strength In Small-Cap Stocks

Over the past several weeks, we’ve been discussing the increasing relative strength in small-cap stocks, compared to the rest of the broad market, and that bullish divergence continues to widen.

Despite the blue-chip Dow Jones Industrial Average ($DJI) falling 0.8% and closing well below key support of its 50-day moving average yesterday (September 30), the small-cap Russell 2000 Index ($RUT) was unchanged.

More importantly, the Russell 2000 sits less than 1% below its all-time high.

Furthermore, both the small-cap Russell 2000 and NASDAQ Composite printed bullish reversal candlesticks on higher volume yesterday.

This means that a move above the intraday high of those candlesticks could easily lead to a breakout to new record highs in short order.

However, if the intraday lows of those reversal bars are violated within the next few days, we could potentially see a few more weeks of backing and filling.

Below are daily charts of the iShares Russell 2000 Index ETF ($IWM) and the NASDAQ Composite Index:

Because of yesterday’s bullish reversal action and increasing relative strength of the small-cap Russell 2000 Index, we are placing Direxion Daily Small Cap Bull 3X ETF ($TNA) on today’s “official” swing trade watchlist. As always, subscribing members of our swing trader newsletter should note our preset and exact entry, stop, and target prices for this new trade setup in the “watchlist” section of today’s report.

If the uptrend in the small-cap Russell 2000 resumes in the coming days, bullish momentum could easily spark a sharp, multi-week advance in small-cap stocks. As such, a long position in $TNA would be ideal to take advantage of such a fast-paced move. However, it’s important to note one key point when buying $TNA.

Because it is a leveraged ETF, $TNA is not suitable for long-term “buy and hold” investing (which we never do). This is because many leveraged ETFs significantly underperform their underlying indexes as holding duration of the ETF increases.

On the daily chart of $TNA below, notice how yesterday’s intraday low correlated to support of both its 20-day exponential moving average and new support of the prior highs (formerly resistance):

As for current ETF holdings in the model portfolio of The Wagner Daily, Guggenheim Solar ETF ($TAN) once again showed major relative strength yesterday by rallying more than 3% on a weak day in the overall stock market.

Now that our $TAN position is showing an unrealized gain of more than 40% since our original buy entry (July 2), we plan to lock in our large profit by selling all shares of this ETF on today’s open.

Soon, be on the lookout for an educational trading strategy article (here on this blog) that will walk you through the anatomy of this highly profitable, intermediate-term ETF trend trade that our subscribing members are quite pleased with.

Are you prepared to profit from a breakout to new highs in the Russell 2000? Have you already been profiting from strength in small-cap stocks? Share your thoughts below.