The Technical Indicator: Charting a bull-flag breakout, S&P 500 extends rally as volatility recedes

Against this backdrop, the S&P 500 has staged a bull-flag breakout — clearing major resistance (3,233) — while the Nasdaq Composite has registered its latest record close.

Before detailing the U.S. markets’ wider view, the S&P 500’s SPX, +0.53% hourly chart highlights the past two weeks.

As illustrated, the S&P has broken out, reaching positive year-to-date territory. The upturn punctuates a flag-like pattern, the previously tight three-session range.

Tactically, the breakout point pivots to support, an area closely matching the June peak (3,233).

Conversely, consider that Monday’s session high (3,258.6) registered just under next resistance at the February gap (3,259.8), detailed last week.

Meanwhile, the Dow Jones Industrial Average DJIA, +1.14% continues to digest last week’s decisive breakout.

The index has registered five straight closes atop its 200-day moving average, currently 26,230.

Consider that the prevailing pullback has been flat, likely positioning the Dow to build on its steep initial rally.

Against this backdrop, the Nasdaq Composite COMP, -0.46% is traversing a jagged near-term backdrop.

Tactically, last week’s close (10,503) matched the 10,500 inflection point. (Also see Thursday’s session high (10,499.8).)

More broadly, the index has sustained its early-July breakout, better illustrated on the daily chart below.

Widening the view to six months adds perspective.

On this wider view, the Nasdaq has absorbed last week’s respectable downdraft from record highs. Recall last Monday’s bearish engulfing pattern (long red bar) spanned 4.0% across a single session.

Tactically, the 20-day moving average and the breakout point (10,131) underpinned the pullback, preserving a bullish near- to intermediate-term bias.

More immediately, the Nasdaq’s recent whipsaw has been punctuated by Monday’s record close.

Looking elsewhere, the Dow Jones Industrial Average has sustained a decisive mid-July break atop the 200-day moving average.

To reiterate, the initial spike marked a two standard deviation breakout, encompassing consecutive closes atop the 20-day Bollinger bands.

As always, closes atop the bands signal a near-term extended posture — due to consolidate — against a bullish longer-term outlook.

The Dow’s flat prevailing pullback fits the description of “expected” price action, after a two standard deviation breakout, improving the chances of upside follow-through.

Tactically, major support broadly spans from 26,230 to 26,294, levels matching the 200-day moving average and the June gap.

Meanwhile, the S&P 500 has ventured atop resistance matching the 2019 close (3,230) and June peak (3,233).

The posture atop the 2019 close, by definition, places the S&P in slightly positive year-to-date territory. Separately, the index has reached nearly five-month highs, its best levels since Feb. 24.

The bigger picture

Collectively, the major U.S. benchmarks are acting well technically.

On a headline basis, the Nasdaq Composite has tagged its latest record close, while the S&P 500 has staged a bull-flag breakout, reaching nearly five-month highs, and positive year-to-date territory.

Meanwhile, the Dow Jones Industrial Average continues to lag slightly behind, though the index is digesting a decisive break top the 200-day moving average.

Each benchmark’s intermediate-term bias remains bullish.

Moving to the small-caps, the iShares Russell 2000 ETF IWM, +1.72% has sustained a break to one-month highs, notching four straight closes atop the 200-day moving average, currently 145.94.

Last week’s initial strong-volume spike marked a two standard deviation breakout, encompassing a single close atop the 20-day volatility bands. Bullish price action.

Similarly, the SPDR S&P MidCap 400 ETF MDY, +1.70% has tagged one-month highs.

Against this backdrop, the MDY has closed atop its 200-day moving average, currently 334.04, across two of the prior four sessions.

An extended breakout attempt remains underway. Recently decreased volume — as the MDY holds tightly to the 200-day — improves the chances of more decisive follow-through.

Looking elsewhere, the SPDR Trust S&P 500 SPY, +0.56% remains comparably stronger.

As illustrated, the SPY has reached four-month highs, edging atop the June peak (323.40). Tuesday’s early follow-through punctuates a potentially more decisive breakout.

Placing a finer point on the S&P 500, the index has cleared major resistance.

The upturn punctuates a flag-like pattern, the tight three-session range, underpinned by the 3,200 mark. As always, the bull flag is a continuation pattern.

Tactically, the breakout point matches the June peak (3,233) and pivots to support.

Conversely, the S&P has rallied to next resistance at the February gap (3,259.8), detailed repeatedly.

Monday’s session high (3,258.6) matched resistance, and the S&P has extended its rally attempt early Tuesday.

On further strength, the late-January peak (3,293) marks an inflection point. More distant overhead matches the top of the February gap (3,328).

Beyond technical levels, the S&P 500’s intermediate-term bias remains comfortably bullish amid recently receding volatility.

Revisiting a stray note regarding volatility

On a granular note — and as initially flagged last week — the CBOE Volatility Index has ventured under its 200-day moving average (26.68) notching consecutive closes lower for the first time since February, before the 2020 market crash.

The VIX VIX, +1.02% has extended its downturn early Tuesday.

As always, the 200-day average, as it applies to the VIX, is not a trending indicator, it’s a reference point. To the extent the break lower is sustained, the downturn is consistent with a constructive shift in market sentiment and structure. An escape, in a sense, from the less stable crash-like backdrop.

Also see: Charting a bull-trend whipsaw, S&P 500 nails next resistance.

Tuesday’s Watch List

The charts below detail names that are technically well positioned. These are radar screen names — sectors or stocks poised to move in the near term. For the original comments on the stocks below, see The Technical Indicator Library.

Drilling down further, the iShares Europe ETF IEV, +0.58% is showing signs of life technically. (Yield = 2.0%.)

More directly, the shares have recently reclaimed the 200-day moving average, rising to challenge four-month highs. An intermediate-term target projects to the 46.00 area on follow-through.

Conversely, trendline support closely matches the 200-day moving average, currently 41.88. A breakout attempt is in play barring a violation.

Moving to U.S. sectors, the SPDR S&P Retail ETF XRT, +2.97% is pressing major resistance.

The prevailing upturn punctuates an orderly six-week range, underpinned by the 200-day moving average, and recent trendline support. Also consider that a golden cross — or bullish 50-day/200-day moving average crossover — signaled last week.

More immediately, the group’s tight four-session range, signals muted selling pressure near resistance, improving the chances of an eventual breakout. An intermediate-term target projects to the 50.00 area on follow-through.

Sonos, Inc. SONO, +3.62% is a mid-cap manufacturer of wireless speakers and related accessories.

Late last week, the shares staged a strong-volume breakout, notching a 20-month closing high. The upturn has dovetailed with a bullish 50-day/200-day moving average crossover.

By comparison, the prevailing pullback has been flat, fueled by decreased volume, positioning the shares to extend the uptrend. Tactically, the breakout point (15.80) pivots to support. A sustained posture higher signals a firmly-bullish bias.

Initially profiled June 19, Fiverr International, Ltd. FVRR, -0.52% has returned 28.2% and remains well positioned.

Technically, the shares have established a July flag-like pattern, digesting a steep three-month rally to record territory.

Monday’s close marked a record close, amid increased volume, laying the groundwork for potential follow-through. A near-term target projects to the 93.00 area.

Conversely, trendline support closely matches the prevailing range bottom, circa 79.00. The prevailing uptrend is intact barring a violation.

Finally, Fastenal Co. FAST, +1.24% is a large-cap manufacturer of industrial and construction supplies. (Yield = 2.2%.)

Earlier this month, the shares reached record territory, clearing resistance matching the June peak. The subsequent pullback has been flat, positioning the shares to extend the uptrend.

Tactically, trendline support closely matches the breakout point (42.90) and is followed by the ascending 50-day moving average. The prevailing rally attempt is intact barring a violation.

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Still well positioned

The table below includes names recently profiled in The Technical Indicator that remain well positioned. For the original comments, see The Technical Indicator Library.