AI-Fueled Rally Pushes Stocks Higher, But Technical Warnings Emerge

Technical Stock Market Briefing for Day & Swing Traders
| By Harry Boxer, Technical Market Analyst

Positive Momentum Continues

The major U.S. large-cap stock indexes climbed for the third week in a row and pushed their record levels higher, although mid- and small-cap indexes fell. A U.S. small-cap stock benchmark fell during a week when its large-cap peers posted gains. The Russell 2000 Index finished down around 1.3% overall, with most of the decline coming on Wednesday afternoon in the wake of the Fed meeting.

The NASDAQ outperformed its peers with a 2.3% weekly total return influenced by strong earnings reports from some of the index’s biggest technology stocks.

The S&P 500 and the Dow both finished more than 2% higher for October as each index extended its positive streak to six months in a row. The NASDAQ outperformed with a 4.7% rise—its seventh consecutive monthly gain. Year to date, Nasdaq is up nearly 23%, the S&P 500 is ahead 16.3%, and the Russell 2000 small-cap index is higher by nearly 14%.

Earnings, AI Momentum, and Market Breadth

Reactions to the week’s Magnificent Seven earnings were mixed, with shares of Microsoft, Apple, and Meta Platforms declining after reporting, while Amazon and Alphabet traded higher. Elsewhere, shares of NVIDIA rose and pushed the chipmaker’s market capitalization over USD 5 trillion midweek, making it the first company to ever cross that threshold.

We saw volatility spike in October, but the market rally ends the month largely unscathed. Moving into November, please remain mindful that further spikes in volatility are possible given uncertainty over the timing of Fed cuts, an ongoing shutdown, and signs of fatigue in what has been a relentless market run.

Meanwhile, the surge in AI-related investment looks like it has further to run, extending this positive catalyst for large technology companies, while it also appears that smaller cap firms should benefit from the combination of tax cuts, lower interest rates, and improving growth.

Chip stocks have been a significant attractor of money flow over the past four months as semis are seen as a prime beneficiary from the ongoing AI infrastructure/datacenter buildout. Several prominent semiconductor stocks, such as Nvidia, Broadcom, and AMD, hit fresh all-time highs this week, but has price moved too far too fast?

The PHLX Semiconductor (SOX) hasn’t been this far above its 200-day Simple Moving Average in over a decade. Additionally, this week’s fresh all-time high in the SOX was met with a negative divergence in the Relative Strength Index (RSI). This type of occurrence is not a timing tool (since the RSI could theoretically continue to move higher with price in the future), but it is a potential bearish indicator, and some near-term caution is warranted from a technical viewpoint.

Breadth Divergences and Key Technical Levels

There was a lot of buzz on Wall Street this week over the S&P 500 registering its worst day of market breadth ever on Monday. The index closed at a fresh all-time high that day yet 80% of its constituent stocks declined. In any event, the divergence in breadth is notable as SPX market breadth slid to a two-month low this week. The “bad breadth” was also seen on both the Nasdaq Composite and Russell 2000 this week.

KEY short-term technical levels are support at SPX 6802–05, 6765–70, and 6660–65. Resistance at 6920–22 and 6985–95.

While I do advise caution and the need for heightened awareness of the current vulnerable condition of the market’s technicals, we at thetechtrader.com will always “Trade What We See, Not What We Think.”

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