All major U.S. indices closed higher last week except the small-cap Russell 2000, which lost just 0.4%. This was the market’s fifth week of overall strength, and the modest advance nudged the S&P 500 back into positive territory for the year. 

The tech-heavy Nasdaq 100 remains in the lead this year, up 9.7% through the end of October. Technology stocks, specifically the Nasdaq 100 and Composite indices, are critical to overall market performance this month. We will be taking a closer look at both of these in a moment.

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From a sector standpoint, last week’s advance was led by health care and consumer discretionary, which gained 3% and 1.7%, respectively. Asbury Research’s own ETF-based metric shows the biggest sector-related investor inflows during the past week went into health care, fueling strength in the sector. 

The two weakest sectors last week were utilities and consumer staples, which lost 1.9% and 1.7%, respectively.

Technology At Critical Decision Point

In last week’s Market Outlook, I pointed out the Nasdaq 100’s move above its 4,451 Sept. 17 high on Oct. 22 suggested “the index’s larger 2015 bullish trend is resuming and clears the way for a retest of its July 20 high at 4,694.”

The chart below shows that resistance was tested last week. The index traded as high as 4,679 on Oct. 28 before closing at 4,649 on Friday.

Last week’s rally sets up a near-term decision point for this market-leading index, which has outperformed the S&P 500 all year. A sustained rise above 4,694 clears the way for more fourth-quarter strength and a Santa Claus rally. However, if the index fails to get and stay above this level this month, it will warn of the broader market’s vulnerability to a tech-led, multiweek pullback first.

The next chart underscores how formidable this overhead resistance level in technology stocks really is. The Nasdaq Composite, the Nasdaq 100’s bigger cousin, includes more than 2,000 constituent stocks.

It also began this week just below major overhead resistance at its 5,133 March 2000 tech bubble high.

In the July 27 report, I pointed out a failed bullish breakout above this resistance, saying it would probably coincide with a broader market decline. The index proceeded to collapse by an additional 15.7%, to the Aug. 24 low, while the S&P 500 declined 10.2%.

Now that the Nasdaq Composite has rebounded to test 5,133 again, what happens next will be extremely important to upcoming market direction. 

A sustained rise above this resistance would indicate a major bullish breakout and portend more strength into 2016. Yet another failure would probably result in a round of profit-taking that could lead the broader market into another corrective phase.

Rising Rates Support Higher Stock Prices

I recently discussed how the prescient and forward-looking bond market was signaling caution. But I said a sustained rise above 2.12% in the yield of the 10-year Treasury note would be evidence the bond market was betting on better economic times ahead.

Yields rose above 2.12% at the end of last week, closing at 2.16% on Friday.

The 2.12% level is also the current location of the 200-day moving average, which has closely defined the trend in long-term U.S. interest rates for decades. 

As long as yields can remain above 2.12%, it would clear the way for a rise to the next key level at 2.3%. It would also indirectly support the likelihood that the formidable overhead resistance levels facing the Nasdaq indices will be broken this quarter.

Another Setback for Gold

In the Oct. 19 Market Outlook, I pointed out that SPDR Gold Shares’ (NYSE: GLD) Oct. 9 breakout higher from 10 weeks of investor indecision targeted a rise to $117.50. I said that level should be met as long as the total net assets invested in the ETF continued to expand to indicate near-term bullish conviction.

GLD’s rally stalled at the 200-day moving average, a major trend proxy, after which the total net assets started to contract. This contraction has driven GLD back into the upper boundary of the indecision area at $109.20, from which the recent rally must resume to keep my $117.50 target intact.

However, the lower panel of the chart shows total net assets invested in GLD contracted below their 21-day moving average, which warns that a new trend of monthly contraction may be beginning. The last time these assets fell below that moving average, which was between June and early August, they triggered and fueled a decline in GLD.

Gold bulls may want to consider taking a defensive stance until GLD rebounds from $109.20 support on a sustained expansion in assets — one that puts them back above their 21-day moving average.

Putting It All Together 

The stock market is perhaps facing its biggest challenge of the fourth quarter this week as the market-leading Nasdaq 100 and Composite indices are both testing formidable overhead resistance levels that previously marked, if not triggered, the beginning of the broader market correction in August. A sustained rise above these levels — 4,694 in the Nasdaq 100 and 5,133 in the Nasdaq Composite — would be necessary to clear the way for a sustainable Q4 advance. 

The recent move back above 2.12% in the yield of the 10-year Treasury note indirectly favors a bullish resolution in these indices and the broader market.

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This article was originally published on ProfitableTrading.com: Market May Face Its Biggest Q4 Challenge This Week