There’s an interesting relationship between the market and the headlines right now.
And we can use it to our advantage…
You might have noticed, I’m following the iShares Russell 2000 ETF (NYSE: IWM). It’s an index comprised of small-cap stocks.
And the recent momentum just opened a perfect trading window.
Test yourself: Look at the chart below.
Given what you know about the world right now, pick a direction…
Don’t stress out, I’ve got the answer.
But make sure to test yourself and see if we come to the same conclusion.
Your goal is to become a self-sufficient trader, and these kinds of exercises will help you grow to no longer need my help.
Got an answer in your head?
Here’s my trade idea…
The False Cease Fire
Last Wednesday, the market gapped up.
The U.S. and Iran announced a conditional two-week ceasefire, and the Strait of Hormuz was set to reopen.
As a result, oil plunged well below $100 a barrel, and indexes surged.
The IWM was no exception. The index spiked alongside everything else.
Here’s the problem: the ceasefire didn’t work out.
Over the following weekend, peace talks collapsed entirely. And yesterday morning, April 13, oil jumped back above $100 a barrel.
Trump announced on Truth Social that the U.S. will blockade any ships entering or leaving the Strait of Hormuz. U.S. Central Command confirmed the blockade began at 10:00 A.M. Eastern on April 13.
Iran’s response? Their parliamentary speaker says the country “will not submit to any threat.” The IRGC Naval Forces warned that military vessels approaching the strait will be considered ceasefire violations and dealt with severely.
The same geopolitical pendulum I’ve been trading for weeks just swung to the other side.
What the Chart Is Telling Me
Look at the IWM chart again…
The ceasefire gap-up pushed the price toward levels from February and March that act as resistance.
The index ran straight into that ceiling on ceasefire euphoria.
When an index gaps up to that extreme, the price is likely to pull back to the new local lows at least for a bounce. And when we consider the catalyst for the move basically dissolved… that pullback looks even more likely.
The unfounded bullishness is baked into the price. There’s still time to find a good entry.
My Position
I like to trade the IWM because it’s cheaper than indexes like the S&P 500 ETF Trust (NYSE: SPY) or the Invesco QQQ Trust (NASDAQ: QQQ).
Plus, the small-cap stocks in the IWM swing harder in terms of percentages. And that volatility makes it more valuable when we time the moves correctly.
I’m looking for Put contracts on the IWM right now.
My thesis is straightforward:
- The ceasefire euphoria pushed prices to unsustainable levels
- The catalyst that created the gap has now reversed
- And the chart is set for a pullback to the ceasefire lows or pre-ceasefire levels.
The blockade of Iranian ports is the opposite of de-escalation.
Markets that gap up on peace and then wake up to a naval blockade don’t usually hold their gains.
Pay attention to the headlines, and get ready for a pullback.
Stay Street Smart,
Jeff Zananiri
*Past performance does not indicate future results, Not typical.
