The first test for tactical small cap leadership

The Russell 2000 (IWM) has shown tactical leadership by completing a double bottom relative to the S&P 500 (SPY) off the April and August lows. This breakout for small cap leadership now faces its first major hurdle.

IWM’s relative strength has rallied to its declining 200-day moving average versus SPY, near 0.3644. While the double bottom favors further upside and suggests a potential move toward key retracement levels (see chart), clearing this 200-day moving average is critical for small caps to sustain their new-found leadership over large caps.