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How a Small-Cap ETF Is Playing the Part of Lucy to Traders' Charlie Brown

Every time traders think they're about to kick the ball and send the iShares Russell 2000 ETF flying, Lucy pulls the ball away and they end up flat on their backs.
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Buyers continue to get just enough good economic news to remain in the market. This Wall of Worry feels extremely steep, but bulls, especially in tech, hang on with all their might.

Thursday's rally puts the iShares Russell 2000 ETF (IWM) back into "maybe the market will like me again" territory. The 10-day exponential moving average (EMA) and the 21-day EMA are within pennies of each other. The cat-and-mouse game of one crossing above the other has been played out for six weeks now. One has to think this tight band will culminate with an explosion move in the near future.

Every possible breakout or breakdown has been frustrating. It's as if the IWM is Lucy from the Peanuts cartoon. The football is a clear breakout or breakdown, and traders are Charlie Brown. Every time you think you're about to kick the ball and send IWM flying, Lucy pulls the ball away and we end up flat. Again.

Despite the struggles in small-caps, the SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ) continue to push new highs. We're not nearly as extended away from the 10-day EMA on the SPY as tech doesn't have quite the same pull as on QQQ.

One note: The last three sniffs of the 50-day EMA have been great entries on the SPY. We saw one the last week of April, the end of the first week in May, and just over a week ago. I would maintain a tight stop or a smaller size position. Remember, though, that the key is to buy on the reversal, which brings us to another note: The reversals were all gaps higher the following day.

Gaps can be difficult for some traders to buy. You can get stuck in the trap where you feel like you already missed the move, or you worry about a gap fill. It is understandable, but that's where sizing and stops come into play. If you don't oversize and you maintain a stop somewhere near the previous day's low, then a gap fill shouldn't stop you out, and if you do get stopped out, you should still have plenty of capital to live to fight another day.

At the time of publication, Byrne had no positions in the stocks mentioned.