We do not want to have a bullish or bearish bias but rather use technical analysis and inter-market analysis to tell us where the market could be headed next. Let’s get started:

IWM daily chart:

Yesterday, the IWM saw a large bounce in percentage terms but if you look at the volume (blue arrow) you can tell that it came on unimpressive volume. That is not the volume action you want to see with a strong price movement to the upside. Looking at the shorter-term RSI (2) it is getting frothy (overbought condition) but the RSI can stay extended for a longer period of time before reversing. The PPO is moving upward but is still in negative territory.

The price action we are seeing in this bounce could very well be a bear flag meaning that after the bounce the down trend will resume and test the previous low and perhaps create a lower low before bottoming. I believe that we will still likely see another run up towards the 210 area of resistance. On a positive note, we have recaptured the 20-day moving average (MA) but the 50-day MA will be met around the 210 zone (slightly above it) and will also form resistance that needs to be overcome. Both the 20-day MA (green) and the 50-day MA (blue) are still downward sloping (a negative) and the 200-day MA (red) is starting to curl over (down).

The red dashed resistance line around the 210-mark acted as support previously (numerous touch points in the past) and will likely be an area of significant resistance now. Please note that we are speaking about a zone and not just the number 210. As you can see from the blue arrows on the left the volume shelf really kicks in around 212 to 225. Here a lot of people have bought in the past and positions are currently in the minus. A good possibility is that these people will unload (sell) into market strength creating a lot of supply. Therefore, we could see the IWM sell off once it reaches the 210 mark and above.

This could however pose an interesting area to set up a small, short position once the 210 has been reached. We will investigate this looking at the price action and check for overbought condition in the upcoming days. So far, the downtrend (blue dashed line) in intact and will also act as resistance. 

SPY daily chart: