The Russell 2000 is an index containing – you guessed it – 2000 Small Cap stocks. It’s also an index that is breaking down sharply through resistance this week. The significance of this move is a higher probability of lower prices in the immediate future (over the next few weeks). Another impact is that most US markets are correlated to the Russell 2K. Capital preservation is a smart move. Cash is a position too.

The chart below may look complicated, but it’s actually very simple if we break it down. The index formed a double top with a negative momentum divergence (black lines). Support has now been broken (shaded area around 1100). The move from the highs through the shaded resistance marks equilibrium and our measured move to the downside (orange dashed lines). The measured move lines up great with a drawn parallel trend line (green dashed line) only touched back in October 2011. The aforementioned has also lined up well with a 50% Fibonacci retracement and the 200 week moving average. This confluence of resistance is a magnet and our downside target (a drop of 11%). The only other viable target I see is at the 38.2% retracement in confluence with the already established solid green trend line (drop of 6%). We’ll continue to evaluate this decline as it moves along.

How do we take advantage? Through an inverse ETF that goes up in value when the Russell 2K drops in value. A few choices:

• RWM (1x leverage): in general, every point move in RUT is a one point move in the opposite direction for this ETF
• TWM (2x leverage): in general, every point move in RUT is a two point move in the opposite direction for this ETF
• SRTY (3x leverage): in general, every point move in RUT is a three point move in the opposite direction for this ETF

All of the above carry risk to varying degrees. Our risk is defined: If RUT recaptures 1100, we’re out. Classic risk management. We have our stop. We have our target. Trade safe, curious investor.