Small Cap Breakout? or Fakeout?

The US small cap stock index (IWM) has gone nowhere for more than 2 ½ years. Since peaking in June of last year it has been in a protracted downtrend falling 25% peak to trough and during that time formed a series of lower highs and lower lows as you can see in the 5-year chart below.

Bay area investment advisor, cfp, retirement planning specialist - IWM 5-25-16

Just recently, the index broke above the downtrend line. One thing I like to see on resistance breaks as confirmation the break will hold, is for price to immediately fall back to the upper side of that resistance (now turned to support) line, hold and then move higher. This is exactly what happened and adds to the confidence and probability of higher prices ahead. Another bullish note is that price has crossed and held above the 200 day moving average which is just now beginning to curl higher.

While these signals are constructive, small caps are not out of the woods just yet. There is plenty of overhead supply that bulls will have to eat through which should make for a slow grind but most importantly the pattern of lower highs and lower lows still needs to be broken if this index is going to move substantially higher and worthy of long term investment capital.