Tide Turning on Small Caps?

Ah, the art of contrarian investing …

It’s an investment strategy that rewards patience, confidence and rationality with high returns.

Well, the market has certainly been testing my patience lately, as valuations seem to have lost all meaning. (Hello, GME!)

However, it can never shake my confidence … and I have some good firepower behind me right now.

Here we go …

The iShares Trust Russell 2000 ETF (Ticker: IWM) has met its upside target from its breakout in November. 

Here’s how I measure the target …

  • First, I connect the major highs.

  • Then, when the market breaks above that trendline, I measure the distance from the first correction below the trendline and add it to the breakout above it.

See it in action here:

I’m ALSO leaning on a negative divergence (shown the chart above), meaning price has increased while the Relative Strength Index (RSI) has decreased since Jan. 12. 

The RSI, you’ll recall, is the index of the relative strength of uptrends versus downtrends.

My big picture idea is still the same. …

The Fed will keep printing and come up with new tricks to stimulate the markets, and hopefully the economy, until they spark inflation …

This Russell 2000 trade and the SPY put spread I bought last week are short-term trades …

I see a window over the next month where the market can correct around 5-10% …

As a contrarian trader, when the put/call ratio is at an extreme, that’s a pretty solid signal for to go against the crowd…

The Put/Call Ratio Is Tilted

The put/call ratio is a useful indicator of the imbalance of positions in the options market … 

A ratio of 1 means there is an equal number of open positions in puts and calls and the options market is in balance … 

Right now, the ratio is 70% puts versus calls, which is a 16-year low … 

Making the Trade

I think we will see a small correction within a couple of weeks and that is what I am playing for …

Check out the trade I did today …

I purchased an IWM 213/203 Put Spread expiring Feb-19 …

I paid $316 for a maximum profit of $684, which would be a 216% return …

Bring It Home

Income Hunters are at their best when they focus, aim and shoot.

When you take the right shots, it’s easy to manage the trade …

Having a good location minimizes my risk. If IWM closes on a new high, I close the trade with minimal loss.

However, if I am right I double my money at a minimum.

Have a good Wednesday and as always …

Live and Trade with Passion my Friends,

Griff

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