Technical Analysis Weekly

As equity markets digested a wide range of crosscurrents this week, there was no shortage of movement beneath the surface. Market breadth improved notably, with the percentage of S&P 500 stocks trading above their 50-day and 200-day simple moving average (SMAs) rising to 54% and 56%, respectively. There also appeared to be constructive rotation across most sector groups, with the notable exceptions of Technology, Communication Services, and Industrials.

This week, investors and traders may be focused on:

• Potential double-top formations in the S&P 500 and Nasdaq-100 as positioning reaches historical extremes
• Relative strength in value vs. growth as a potential change of market leadership
• Long-term trend-shift signals emerging in small caps
• Potential near-term trend reversals in 10-year Treasury yields and 30-year Treasury bonds
• Continued price strength in crude oil as Energy displays relative strength

Taken together, these intermarket developments may suggest a more defensive technical backdrop. Several markets are crossing important support or resistance zones, while trend-strength and volatility indicators point to the potential for more active price movement. Although some evidence may be viewed as less constructive for U.S. equities, seasonal tailwinds or renewed leadership in Technology and other cyclical sectors could challenge that view.

After breaking levels of near-term support last week, the S&P 500 appears to be forming a potential double top, a classical bearish reversal pattern.

You may have heard of the classic Wall Street adage that "bottoms are events, while tops are processes," referring to the tendency for market tops to develop over time through periods of rotation and distribution. During these periods, leadership often shifts, with more defensive areas of the market showing relative strength while some cyclical groups begin to weaken. Recent sector and factor performance may be consistent with aspects of that environment, though market conditions can evolve quickly.

Neckline support for the potential multi-month double top formation may sit near former highs and September lows around 7,600. If the pattern were to complete, classical charting techniques would identify a measured objective near a cluster of potential longer-term support, including summertime consolidation lows and the 200-day SMA around 7300. Technical patterns are subject to failure and price objectives are not guaranteed to be met.

Finally, the average directional index (ADX), a measure of trend strength discussed last week, appears to be turning higher from recent lows. Technicians often monitor rising ADX readings for signs that a period of consolidation may be giving way to a stronger trending environment. The direction of that trend is typically evaluated using price action and other indicators.

The Russell 1000 Growth index relative to Russell 1000 Value index appears to have broken an important support zone that has been monitored over the past several years and aligns with prior cycle highs.

Since 2024, this polarity zone has coincided with periods where relative performance stabilized before improving in favor of growth. In technical analysis, the more times a level is tested, the more significant some technicians consider a subsequent break of that level.

If growth continues to weaken relative to value, technicians may view it as evidence that market leadership is beginning to rotate. Such a shift could have implications for sector and index performance, particularly given the influence that growth-oriented stocks have had on broader equity market returns in recent years.

Over the last year, the Consumer Discretionary sector has been forming a potential diamond top pattern, a broadening formation combined with a symmetrical triangle, above potential support near former cycle highs. The relatively rare nature of this classical chart pattern may warrant attention from technicians and could be monitored for additional information about broader market conditions if the formation completes.

Despite displaying relative strength versus the broader market over the last week, Consumer Discretionary appears to be encountering resistance near a descending trendline. Meanwhile, the lower boundary of the formation may continue to act as a potential support area.

From a risk-appetite perspective, Consumer Discretionary has historically tended to outperform Consumer Staples during periods of stronger economic and market environments, although past relationships may not persist. Currently, Discretionary relative to Staples remains near yearly lows, which some technicians may interpret as evidence of a more defensive market backdrop.

The Russell 2000 Index's 42-week simple moving average (SMA), which is roughly equivalent to the 200-day SMA, has often been monitored as a potential support level during stronger market environments, although past performance is no guarantee of future results.

Another technical development some technicians monitor is a "death cross," which occurs when the four-week SMA (roughly equivalent to the 20-day SMA) crosses below the 42-week SMA. Historically, this has sometimes occurred during periods of deteriorating trend conditions, although outcomes have varied.

Last week's weekly candlestick appears to have broken both the four-week and 42-week SMAs as these moving averages formed a death cross. Historical instances have sometimes been associated with continued weakness in the index, although past performance is no guarantee of future results and technical signals can fail.

Applying the principle of polarity, former support may become potential resistance. Technicians may be monitoring the four-week and 42-week SMAs near 2,800 as potential resistance. Yearly lows which align with 2024 highs may now act as potential longer-term support around 2,400.

Crude oil finally cleared the September 18 gap zone near $99 after several days of consolidation beneath resistance. Notably, the selling pressure at that level occurred on above-average volume last week, reinforcing its significance as a key supply zone. Friday's breakout also occurred on above-average volume, which some technicians may view as price confirmation due to higher participation.

If the near-term breakout holds, the former resistance zone near $99 may now act as new potential support. Above that, technicians may look towards the upper end of the rising channel near former highs around $112 as the next potential area of resistance.

Relative strength within the Energy sector appears to remain intact. Multiple energy-related groups have reached new yearly highs while a momentum gauge as measured by the relative strength index (RSI) has confirmed the move by registering overbought readings. Although some technicians may view overbought conditions as a potential sign of buyer exhaustion, momentum indicators can remain elevated for extended periods of time when trends are strong.

Last week, volatility in 10-year Treasury yields persisted as yields appeared to test former three-year highs near 5%, an area technicians may be monitoring as potential longer-term support. The move followed extended trend and momentum conditions, with weekly ADX reaching 40, a level often associated with a particularly strong trend.

Technicians often monitor peaks in ADX for evidence that a trend may be becoming extended or entering a period of consolidation and potentially a correction. Over the last 25 years, periods of six or more consecutive weekly advances in 10-year Treasury yields have often been followed by meaningful pullbacks. Historical examples include 2004, 2007, 2016, 2021, and 2022, when yields subsequently declined between roughly 20% and 40% from their highs. While history does not always repeat, some technicians study these episodes for context when evaluating current market conditions.

Given the importance of interest rates across financial markets, continued volatility in yields could influence performance across both bond and equity markets. As discussed last week, the pullback in yields has coincided with improving relative strength in several rate-sensitive areas of the market. Financials, Utilities, and Real Estate have shown signs of stabilization or reversal, while weakness in small caps has begun to moderate.

Technicians may be watching to see whether yields stabilize near current support levels or continue toward another potential support zone near the 2024 highs around 4.7%.

E-mini Nasdaq-100 futures appear to be finding potential near-term support near the August/September lows around 29,000. However, the longer-term price structure appears similar to the potential topping formation developing in the S&P 500, with a possible double top taking shape. Neckline support for this longer-term formation may sit near July lows around 27,200, and technicians may be focused on that level, particularly if support near 29,000 fails to hold.

Positioning data in E-mini Nasdaq-100 futures may also be drawing attention. Some technicians monitor positioning extremes in the Commitment of Traders (COT) report as potential contrarian signals. According to COT data, large speculators are near some of their most net long positioning of the last five years, sitting near the 97th percentile. Perhaps the most notable development is the rapid shift from the 0th percentile in August to the 100th percentile just two weeks ago. The speed and magnitude of this change over the last several months has been historically unusual and may warrant additional attention from technicians.

Conversely, commercial hedgers are near some of their most net-short positions over the last five years. Some technicians may view the combination of elevated speculative positioning and extreme commercial positioning as supportive of a more cautious or bearish outlook. While positioning data is not predictive and should not be used in isolation, some market participants may interpret these extremes as evidence that downside risks have increased, although past performance is no guarantee of future results.

The bullish backdrop of improving momentum, elevated trend-strength readings, and contrarian sentiment indicators discussed last week regarding long-term Treasury bonds appears to have gained traction in price this past week with a potential "bear trap."

In technical analysis, a bear trap refers to a failed breakdown below support. The initial move may lead market participants to interpret the price action as the start of a new or continuing downtrend. However, when/if buyers subsequently regain control and push prices back above the prior support level, technicians may view the breakdown as failed and evidence that selling pressure may be easing.

Failed moves can sometimes lead to accelerated moves in the opposite direction, although past performance is no guarantee of future results. Applying the principle of polarity, former resistance near 107 may now act as potential support, while a potential area of resistance exists near the 2025 lows around 111.