A "Here Or There" Setup In The Russell 2000
A look at the liquidity structure in smallcaps and why it's either going to bounce hard or get killed.
For the past few weeks, my base case for the market has been a “flaming hot garbage trading range.”
You know the kind. Where traders are ground into dust chasing statistical noise while larger players start to re-position into the next market leaders.
And it’s been a good call…yet when the market can’t catch a bid after a strong Friday bounce, it’s tough to bet on range because it means you have to be bullish and fade the market when it looks like the bid is about to be yanked and we see a 3% down day.
Yet breadth looks OK, and some key names are resetting after their short term excess.
The best example right now is AMZN. The news hit today that they’re going to do a $15B bond sale, their first since 2022.
Traders got beared up in the early session, and I have a feeling that many are looking for the earnings gap fill, similar to what happened to ORCL.
Instead, it knocked out a higher low. Combine that with the catalyst, and how AMZN should have tanked, and that’s telling me we’re getting higher odds of reversion in the markets.
We’re close to carving out a low, but we could have one or two more rugs before a bounce.
Like what I’m seeing in the Russell 2000 index:
We’re right on the edge of a liquidity cliffside. When we see a large gap in volume, there’s a tendency for a swift move through into the next level, which would be right around 228.
If you have one more push below that, then you have the market testing the swing AVWAP from the April lows around 224.
But if the lows hold here, then you’ve got an easy short cover rally up into 240.
It starts to sound like a zen koan:
“The market could go up or down.”
That doesn’t seem actionable, does it?
Given where we sit, and the cliffside the Russell faces, we’re not going to stick around at this price level that long. It’s not sticky, and soon we will see a fast departure away from it.
That’s where the options market comes into play. You can structure a bet that profits on a fast move in either direction.
For Convex Spaces clients, we’re going to build out a trade that takes advantage of the fast move that’s about to hit the markets, and I’ll step through all the trade adjustments and why we get an extra edge in the options market.