I have two charts this week that show the potential risks and rewards currently in the stock market.

First is a chart of Invesco QQQ Trust (Nasdaq: QQQ). This is an ETF that tracks the Nasdaq 100 Index, the tech-heavy index that includes market favorites like Tesla and the FANG stocks.

Since breaking out of a basing pattern in October, QQQ has completed a throwback and resumed its rally.

A throwback is a bullish indicator for chart readers. After prices break out of a pattern, there should be some traders who want to take profits. That should lead to a short selloff where the market is thrown back toward the original pattern. In a bull market, the decline stops before retreating into the pattern. That’s what happened in the case of QQQ.

The price target shown on the chart is found by measuring the depth of the pattern and projecting a price move of that size from the breakout level. This is an initial price target and shows that additional gains in QQQ are likely.

Now, for the possible risks of the market, I looked at a chart of iShares Russell 2000 Index Fund (NYSE: IWM). In the chart below, the throwback is underway and has fallen back below the high of the pattern.

IWM tracks the small-cap index. Small caps are generally the most speculative stocks and tend to be the leaders in a strong bull market. If the bull market is to continue, I believe small caps need to resume their uptrend quickly. If we don’t see new highs in IWM, I will be more worried about the state of the market.

The Bigger Picture

Of course, I looked at more than two charts over the weekend as I prepared my review. On balance, most indicators are confirming the message of these two charts.

There are reasons to be concerned about the momentum and breadth indicators of the small-cap index. Another reason for concern is potential weakness in the breadth of tech stocks. On the other hand, momentum of tech and large caps are bullish. Breadth of large caps is bullish. And sentiment continues to support the bullish scenario.

Turning to my indicators, the short-term outlook for SPDR S&P 500 ETF (NYSE: SPY) is also bullish. My Income Trader Volatility (ITV) indicator is on a “buy” signal, with the indicator (red line) below its moving average (blue line) in the chart below.

After approaching its MA, the indicator turned lower, resuming its bullish trend. For those who aren’t familiar with ITV, think of it as a volatility indicator (like the VIX), but for individual stocks and ETFs. So lower volatility is generally a good thing.

My Profit Amplifier Momentum (PAM) indicator remains weak, however. PAM is designed as a short-term indicator. It shows that momentum (red bars) is mildly bearish.

For the short term, based on my indicators, I am cautious. My indicators are split, as are all indicators I am seeing this week. But on balance, they remain bullish. The warning signs that are developing should not be ignored because they could turn the weight of the evidence to a bearish outlook very soon.

I’ll know more next week as to the likelihood of a strong December.

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