NEW BEARISH Plays

iShares Russell 2000 - IWM - close 71.62 change +2.13 stop 73.10

Company Description:
iShares Russell 2000 Index Fund (the Fund) seeks investment results that correspond generally to the price and yield performance of the Russell 2000 Index (the Index). The Index measures the performances of the small-capitalization sector of the United States equity market. The Index is a float-adjusted capitalization-weighted index of equity securities issued by the approximately 2,000 smallest issuers in the Russell 3000 Index. The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. The Fund’s portfolio of sector includes consumer non-cyclical, financial, industrial, consumer cyclical, technology, communications, utilities, energy and basic materials. BlackRock Fund Advisors serves as the investment adviser for the Fund. (source: company press release or website)

Target(s): 69.05, 68.05
Key Support Areas: 70.25, 69.75
Key Resistance Areas: 72.10, 72.60
Time Frame: About 2 weeks

Why We Like It:
The snap back rally from last week's plunge has been nothing short of incredible. But I believe it is time for a snap back down and I suggest readers take advantage of it by initiating short positions in IWM. The ETF is has already made it back up to its 20-day SMA from below and has also retraced over 61.8% of the decline from the April 26 highs of $74.66 to the May 7 low of $64.64. I threw out the long bottom wick from Thursday's plunge because it may or may not have been "real." In any event, anyone who has held positions throughout the past couple of weeks has to be thinking about selling positions now that the retracement back up has come so far. And if they were stopped out they are probably hesitant to jump back in the market right now. In addition, IWM is approaching a primary downward trend line and for options traders volatility has been sucked out of the option premium over the last several days. An increase in volatility will be good for option traders. I believe now is a good time to initiate PUT positions at current levels or a failed rally into the $72 area just overhead. This also gives us a good reference point to place a stop at $73.10 which is above the downtrend line and the 20-day SMA. I will be surprised if IWM can break through this congestion but if it does we will have a relatively small loss. The trade also sets up a good 2:1 risk reward ratio. We are risking about $1.30 to make $2.60. Our stop is $73.10.

Suggested Position: Short IWM stock at current levels or a failed rally into the $72.00 area.

Option Traders:
Suggested Position: Buy JUNE $72.00 PUT, current ask $2.45

Annotated chart:

Entry on May xx
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 79 million
Listed on May 12, 2010