The Technical Indicator: Charting market rotation: S&P 500, Dow industrials challenge record highs

Against this backdrop, the S&P 500 and Dow industrials have extended aggressive rally attempts — briefly tagging record highs to start this week — amid market rotation and expanding sector participation.

Before detailing the U.S. markets’ wider view, the S&P 500’s SPX, +0.03%  hourly chart highlights the past two weeks.

As illustrated, the S&P has staged a technical breakout, of sorts.

Specifically, the index briefly tagged record highs Monday before pulling in to the former range.

Monday’s close (3,550.5) closely matched the October peak (3,550), and marked the S&P’s second-best close on record.

Similarly, the Dow Jones Industrial Average DJIA, +0.73%  has gapped sharply higher, briefly tagging record territory.

Consider that Monday’s session high (29,933) registered within view of the marquee 30,000 mark.

Tactically, the Dow is traversing a much less-charted patch, better illustrated on the daily chart.

Against this backdrop, the Nasdaq Composite COMP, -0.65% has diverged from the other benchmarks.

To be sure, the index briefly tagged record territory at Monday’s session high (12,108).

But the subsequent selling pressure punctuated a failed test of resistance, better illustrated below.

(On a granular note, Monday’s close (11,703) matched the October gap (11,704).)

Widening the view to six months adds perspective.

On this wider view, the Nasdaq has balked at major resistance matching the September peak. In the process, the index formed a bearish engulfing pattern, the long red bar, engulfing the range of the prior two sessions.

The question now is the aggressiveness of the downside follow-through, or lack thereof.

Tactically, familiar support (11,460) is followed by the 50-day moving average, currently 11,304, and the former breakout point (11,245).

Delving deeper, likely last-ditch support matches the July peak (10,840). A sustained posture higher signals a range-bound backdrop, and a bullish intermediate-term bias.

The prevailing pullback punctuates a massive 9.0% one-week rally to start November.

Looking elsewhere, the Dow Jones Industrial Average has extended its rally attempt.

Consider that the index has gapped sharply higher — briefly clearing its range top — unlike the Nasdaq Composite.

Tactically, the Dow’s record close (29,551.42) and the February peak (29,568.57) — formerly the record peak — remain overhead inflection points.

More broadly, the prevailing upturn punctuates a successful test of the 200-day moving average, and originates from three-month lows.

Meanwhile, the S&P 500 has tagged a record high, rising from a double bottom defined by the September and October lows.

The prevailing upturn originates from major support. Recall that the October low (3,233.9) closely matched the June peak (3,233).

The bigger picture

As detailed above, the major U.S. benchmarks have diverged this week, and the bigger-picture backdrop is not one-size-fits-all.

On a headline basis, the S&P 500 and Dow industrials have extended their rally attempts, gapping higher to briefly tag record territory.

Meanwhile, the Nasdaq Composite has balked at its range top, drawing respectable selling pressure near major resistance.

Amid the cross currents, the bigger-picture backdrop remains comfortably bullish to start November and the best six months seasonally — November through April.

Moving to the small-caps, the iShares Russell 2000 ETF has also staged a breakout of sorts.

Here again, Monday’s session high (178.10) marked an all-time high. Still, the session close (169.55) registered comfortably under its record close (173.02), established August 2018.

Slightly more broadly, the prevailing upturn punctuates a bullish island reversal to start November.

Similarly, the SPDR S&P MidCap 400 ETF has tagged an intraday record high.

Still, the session close (380.10) registered under the record close (384.02), established February 2020.

Combined, the small- and mid-cap benchmarks are near-term extended, though the strong-volume breakouts confirm the prevailing uptrends.

Looking elsewhere, the SPDR Trust S&P 500 has also tagged record territory.

Consider that the session close (354.56) marked the SPY’s second-best on record, placing it fractionally atop the September peak (354.02).

Placing a finer point on the S&P 500, the index has extended its rally attempt, rising to briefly tag record highs.

To reiterate, Monday’s close (3,550.5) closely matched the October peak (3,549.9), and marked the S&P’s second-best close on record.

Tactically, deeper floors match the October gap — at 3,482 and 3,500.

More broadly, the S&P 500 has extended an aggressive November rally attempt.

Against this backdrop, Monday’s price action threaded the needle on a slightly granular technical point.

Market bears will point to a failed breakout attempt, ultimately capped by the September peak.

Conversely, market bulls will point to a sharp gap higher, and a close fractionally atop the October peak. The upturn narrowly punctuates a double bottom — the W formation — defined by the September and October lows.

Tactically, an intermediate-term target continues to project to the 3,800 area on follow-through. (The target technically rests at 3,798.)

Beyond technical levels, the S&P 500 is near-term extended — and due to consolidate — following a seven-session rally spanning as much as 412 points, or 12.7%. Its more important intermediate-term bias remains comfortably bullish, based on today’s backdrop.

Also see: Charting a bullish reversal, S&P 500 spikes from key support amid election overhang.

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.

Sector participation broadens amid vaccine-fueled market rally

Drilling down further, the prevailing leg higher has been relatively broadly-based amid expanding sector participation. Still, one former sector leader — large-cap technology — has diverged amid market rotation. Several groups exemplify the prevailing backdrop.

To start, the Industrial Select Sector SPDR XLI, +1.53%  has taken flight, briefly tagging all-time highs. (Yield = 1.7%.)

The strong-volume gap higher confirms the group’s primary uptrend.

Though near-term extended, and due to consolidate, the group is attractive on a pullback. Tactically, the bottom of the gap (81.70) closely matches the breakout point.

Meanwhile, the Materials Select Sector SPDR has knifed more firmly to record territory, building on last week’s initial breakout. (Yield = 1.7%.)

The prevailing upturn punctuates a double bottom — the W formation — defined by the September and October lows.

Here again, the group is near-term extended and due a cooling-off period. Tactically, gap support (69.40) is followed by the firmer breakout point (67.00).

Financials take flight, gap to eight-month highs

Looking elsewhere, the Financial Select Sector SPDR XLF, +0.18%  has also come to life technically.

As illustrated, the group has gapped sharply atop trendline resistance, reaching eight-month highs.

Slightly more broadly, the strong-volume spike builds on an early-November rally atop the 50- and 200-day moving averages, also consistent with a major trend shift.

Tactically, the top of the gap (26.65) is followed by an inflection point closely matching the September peak (26.00).

Similarly, the SPDR S&P Regional Banking ETF KRE, +1.20%  has taken flight, gapping to eight-month highs.

The strong-volume rally punctuates a double bottom defined by the July and September lows. Tactically, the top of the gap (45.22) is followed by the deeper breakout point (42.20).

Separately, notice the pending golden cross — or bullish 50-day/200-day moving average crossover — signaling that the intermediate-term uptrend has overtaken the longer-term trend.

Fundamentally, the financials’ resurgence has surfaced amid a surging 10-year Treasury note yield, detailed Monday.

As always, the banks benefit from rising yields in the form of an improved rate spread, or the difference between the rate at which a bank borrows, and the rate it subsequently lends to customers.

Transportation sector challenges key resistance

Looking elsewhere, the iShares Transportation Average ETF IYT, +1.33%  is trying to break out.

Technically, the group tagged an intraday record high before reversing to close slightly under resistance.

More broadly, the group is rising from a nearly three-month bullish continuation pattern. Recall that the early-August rally marked a two standard deviation breakout, encompassing four straight closes atop the 20-day Bollinger bands.

As an economically-sensitive sector — raw materials are transported to manufacturing facilities, then finished goods are re-transported to points of sale — the group’s breakout attempt supports the bull case.

Drilling down within the transportation sector, the U.S. Global Jets ETF JETS, -1.47%  has taken flight.

Consider that vaccine-fueled optimism propelled a massive strong-volume gap atop the 200-day moving average, a widely-tracked longer-term trending indicator.

Large-cap technology lags behind amid market rotation

Finally, the PowerShares QQQ Trust QQQ, -0.91%  tracks the Nasdaq 100 Index offering a large-cap technology sector proxy.

Notably, the QQQ has not broken out.

To the contrary, the QQQ has formed a bearish engulfing pattern slightly under major resistance. (The long red bar, engulfing the range of the prior two sessions.)

The strong-volume downturn signals a potential temporary shift in market leadership.

More broadly, the groups detailed exemplify a rotational market backdrop, punctuated by broadening sector participation. The November sector price action, on balance, strengthens the bull case.

Editor’s Note: This is a free edition of The Technical Indicator, a daily MarketWatch subscriber newsletter. To get this column each market day, click here.

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.