As the vaccine rollout progresses, small caps continue to rally, with the Russell 2000 up 50% within the last six months. Funds like the Direxion Daily Small Cap Bull 3X Shares (TNAhave gained over 200% within the same time frame.

TNA tracks the Russell 2000 Index and seeks daily investment results equal to 300% of the daily performance of the index. The ETF is up four times the index within the past six months.

^RUT Chart

Technical indicators in the same time frame can help confirm the momentum. If we apply a relative strength index (RSI) indicator over its six-month chart, we can see the 72.64 level showing an overbought condition.

Furthermore, if we up the ante on the RSI with an additional indicator via the stochastic RSI (StochRSI), we can confirm the overbought territory further at 0.764.

This doesn’t necessarily portend to a downtrend just yet, but a short-term pullback could be on the way before TNA resumes its upward trajectory. If the bulls win, a new but higher resistance level could take place around the $78 price.

TNA Chart

Going The Bearish Route?

If a short term pullback does take place, inverse funds like the Direxion Daily Small Cap Bear 3X Shares (TZA) could be a wise play. As mentioned, TZA takes the opposite approach of TNA, seeking daily investment results of 300% of the inverse (or opposite) of the daily performance of the Russell 2000® Index.

The fund invests in swap agreements, futures contracts, short positions, or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the index equal to at least 80% of the fund’s net assets. The index measures the performance of approximately 2,000 small-capitalization companies in the Russell 3000® Index, based on a combination of their market capitalization and current index membership.

TZA has been stuck in oversold levels and what goes down (bearishness in the Russell 2000) must eventually come up. Traders can keep this fund on their watch lists and take advantage of any short term pullbacks in the small cap index.

TZA Chart

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