The Technology Select SPDR (XLK) is developing an inverse head-and-shoulders pattern that, on a sustained breakout, could produce a potential target near $216. Because technology is the S&P 500's largest sector, its move matters for the broader index, even as the equal-weight S&P 500 ETF RSP has been rolling over.
A pattern four months in the making
XLK has rallied sharply from its late-July low. Yet the fund remains essentially flat versus late May, so technology has spent nearly four months digesting its prior advance rather than extending it.
That distinguishes the current setup from late May, when XLK was coming off a nearly parabolic two-month run and looked far more extended. A developing inverse head-and-shoulders pattern, combined with a smaller bullish handle formation, would complete on a sustained breakout and, using a measured-move approach, produce the $216 target. Since 2023, five prior XLK pattern breakouts have produced immediate upside follow-through followed by additional gains.
Why the S&P 500 is watching
Technology is by far the largest sector within the SPX, so its rebound matters beyond the sector itself. As technology has recovered, the SPX has continued making higher highs and higher lows and is now attempting to complete its own inverse head-and-shoulders pattern. That resembles the pattern seen in June and July, when back-and-forth trading eventually gave way to another push higher.
More recently, another dip was bought following the Fed meeting, helping the SPX break out to new all-time highs.
The equal-weight counterpoint
Not every part of the market is confirming the move. RSP, the equal-weight S&P 500 ETF, has been moving lower after reaching the upside target from its own inverse head-and-shoulders pattern. From May through August, weaker technology stocks were offset as other sectors stepped up and let RSP keep climbing; since then, that trend has reversed, and demand has left some of the non-growth sectors as technology improved.
That has created a potential bearish head-and-shoulders pattern in RSP, although important support remains intact. If XLK's bullish pattern keeps working, it could help the SPX hold up and let RSP's support hold too. But if XLK's pattern fails while breadth keeps deteriorating, a downside break in RSP would become far more concerning.
Source: CNBC
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