In unusual occurrence, both the Dow and small caps could be headed for a breakout, charts suggest

While large-cap growth and technology have surged, the iShares Russell 2000 ETF (IWM) and SPDR Dow Jones Industrial Average ETF (DIA) are now exhibiting bullish formations despite their recent underperformance. IWM's potential breakout is contingent on regional banks (KRE) completing a multi-year basing pattern and biotech (XBI) establishing a higher low. For DIA, upward momentum hinges on Apple (AAPL) breaking out from its bullish pattern and Salesforce (CRM) holding critical support levels. Should these key underlying components gain momentum, it could drive significant breakouts in both IWM and DIA, signaling a potential shift in market leadership.

Analysis

While large-cap technology stocks have driven recent market gains, technical analysis reveals emerging bullish formations in two lagging market segments: the iShares Russell 2000 ETF (IWM) and the SPDR Dow Jones Industrial Average ETF (DIA). This presents a rare scenario where opposite ends of the market-cap spectrum exhibit similar potential for a breakout. The performance of IWM is heavily dependent on two challenged groups: regional banks and biotech. The SPDR S&P Regional Banking ETF (KRE) is attempting to hold a multi-week bullish pattern above its '60-breakout zone', which could complete a nearly four-year basing pattern. Concurrently, the SPDR S&P Biotech ETF (XBI), which has been flat since early 2022, must establish a higher low to reverse its negative momentum. For the DIA, a breakout is contingent on key underperforming components. Apple (AAPL) is testing a bullish pattern near a significant uptrend line that has previously preceded rallies to all-time highs. Salesforce (CRM) has pulled back to a critical support zone around $230, a level that has prompted buying interest on three prior occasions since mid-2024. If these specific catalysts materialize, both IWM and DIA could break out from their consolidations and transition into market leadership roles.

Key Decisions for Investors

• Investors should monitor the IWM and DIA ETFs for breakouts from their current patterns, as this would signal a significant broadening of the market rally beyond mega-cap technology.
• For exposure to small-caps via IWM, watch for the regional banking ETF (KRE) to sustain a move above its 60-breakout zone and for the biotech ETF (XBI) to successfully form a higher low, as these are the primary catalysts.
• A potential breakout in the DIA is directly linked to a recovery in its underperforming tech components; therefore, watch for Apple (AAPL) to clear its bullish pattern and for Salesforce (CRM) to hold support at the critical 230 level.
• Consider positioning for a potential barbell leadership scenario by evaluating long positions in both IWM and DIA, contingent on the confirmation of the technical breakouts in their key underlying drivers.