IWM Sends a Loud Relative Strength Message

 

Today was a big day for IWM, and when you view the market through the lens of relative strength the way I do, the message on this chart was loud and clear. This is exactly the type of action I’m always watching for, because relative strength tends to show itself before the obvious price breakout that everyone else reacts to later.

Above, we have a 5-minute chart of IWM, with the middle pane showing the IWM vs SPY ratio, and the lower pane displaying a 5-minute chart of SPY. Before getting into today’s move, it’s important to first look at what happened yesterday. I’ve circled an area where IWM was essentially moving sideways yesterday. At first glance, that kind of price action might look uninteresting. But when I look at the relative strength line during that same period, it tells a very different story. While price was chopping around, the ratio line was moving sharply higher. That is a textbook sign of accumulation and relative strength. Even though price wasn’t advancing yet, money was clearly rotating into IWM beneath the surface.

Fast forward to today and that relative strength continued to assert itself. While the SPY opened the session making a lower swing low, clearly illustrated by the white trendlines, IWM did the opposite. It put in a higher low. That divergence is critical. When the broader market is weakening on an intraday basis but a stock or ETF refuses to break down and instead holds higher lows, it’s sending a strong message. Buyers are stepping in earlier and with more conviction.

Once resistance was broken, IWM did exactly what strong leaders tend to do. It pushed higher throughout the session and closed near the highs of the day. That type of close tells me there was no urgency to sell and that demand remained strong right into the bell.

If you shift your focus to the daily chart on the right, the bigger picture becomes even clearer. IWM is right on the verge of breaking out to a new closing  high. Compared to QQQ and SPY, IWM is clearly the leader right now. Over the past five trading days, the flow of money has been decisively moving into small caps, and the relative strength confirms it. This is exactly why I rely so heavily on relative strength, it keeps me aligned with where the market is actually going, not where I think it should go.

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