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Short the rally in small caps: Technician

Small caps are having a moment.

The Russell 2000 has broken above its 200-day moving average, a widely watched indicator of a shift in the tide of an index, but traders are split on how to play the recent move.

"I think now that the market is becoming more friendly to these riskier names," Eddy Elfenbein said Tuesday on CNBC's "Trading Nation." "I think the small caps have some room to run."

The editor of Crossing Wall Street notes that while the S&P 500 is within shouting distance of its all-time high, the small caps are still in correction territory. The Russell is still down nearly 12 percent from the highs hit back in June.

"The small caps have really lagged. They've sat out so much of this rally," said Elfenbein. "It's the first time [the Russell 2000 closed ahead of its 200-day moving average] in over eight months. Historically, that's a very good sign from small caps."

Not all traders, however, see this move as a sign to buy.

"I see a 200-day moving average that's just sloping down, which means we still have a downtrend," Todd Gordon of TradingAnalysis.com said Tuesday on CNBC's "Trading Nation."

Gordon explains that despite the break above its 200-day moving average, the Russell is still trading below its broader trend line, meaning "resistance still seems to be intact."


Gordon also points out that the two largest sectors represented in the Russell 2000, financials and technology, have been beaten down this year and could continue to drag the index lower.

The financials, which represent 26 percent of the market value of the ETF that tracks the Russell 2000, the IWM, is the worst performing sector in the S&P 500 year to date, while the tech sector has only recently begun to lag.

"The top sectors are in a little bit of trouble here," said Gordon. "I would like to be short."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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