Bouncing Like Clockwork: IWM’s Bear Trap Springs Again

Andrew Kassen

As the Russell 2000 (IWM) broke below it’s 50-Day Simple Moving Average (SMA) last week, we noted the same day that the 12 previous occurrences of this event (i.e since the beginning of 2013) had evolved into a consistent bear trap cycle, inciting rapid and ravenous buying on what conventional technical wisdom suggests is a bearish development.

Summarizing the statistics there we observed:

On average:  IWM spends 2 days below it’s 50-Day SMA, losing -1.73% over that period.

One week later, we can make it 13-of-13: in close alignment with the averages established over the last year, IWM spent 3 days (including the initial close) below the 50-Day SMA, falling -1.55% beneath the average before bouncing (below: orange rectangle, far right) last Thursday.

bear trap

From the bottom put in place during the previous 12 round-trips across the 50-Day SMA, here’s the breakdown of subsequent positive performance mentioned there:

How long is IWM’s advance after bottoming below its 50-Day SMA?

  • Shortest time to next peak (including bottom): 2 days (April, June 2013)
  • Longest time to next peak (including bottom): 37 days (October-November 2013)
  • Average time to next peak (including bottom): 15 days

How does IWM performance during these advances after bottoming below its 50-Day SMA?

    • Best performance: +12.39% (February-March 2014)
    • Worst performance: +0.99% (April 2013)
    • Average performance: +6.48%
    • Average daily performance given average time to next peak: +0.43%

Over these occurrences the average bounce from the trough below the 50-Day SMA is +6.48% over 15 trading days.

Looking at the present, IWM is well ahead of the average pace, already covering as much as +4.21% in 5 trading days.  The chart below shows the weak (+0.99% in 2 sessions), average and strong (+12.39% in 37 sessions) bounce scenarios, with the current bounce-in-progress in orange.  The average bounce scenario sees an additional +2.27% of upside for IWM over the next 2 weeks.

bear trap

This February’s bounce was the strongest over the series studied, advancing 12.4%.  A comparable move here would carry IWM far above it’s all-time high just over 120.  If that happens, expect all-pervasive talk about a “repeat of 2013” – and the rumored extinction of the bears trapped with increasingly boring consistency (and complacency) over the last 12 months.


Twitter: @andrewunknown and @seeitmarket

Author carries net short Russell 2000 exposure at time of publication.  Commentary provided is for educational purposes only and in no way constitutes trading or investment advice.

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Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.