With the stock market now halfway through the fourth quarter, the rally’s continuation into year-end and beyond will depend how well we see sector rotation. When we talk about “rotation,” it’s easy to focus on the most underperforming areas that could potentially snap back. While that’s often true, from a technical perspective, it’s equally important to identify lagging areas that are forming bullish pattern setups. One such area is a key component of the financial sector — the iShares U.S. Broker-Dealer & Securities Exchanges ETF (IAI) . IAI is making a new high today, which may not sound unique given that other areas have also been hitting new highs. However, IAI had been flat since late July, the last time it reached that level. As the first chart shows, the ETF tested that same resistance level seven prior times, each attempt failing, as indicated by the red arrows. That was understandably frustrating for traders anticipating a breakout. Yet, each subsequent pullback also lacked follow-through to drive the ETF meaningfully lower. On six separate occasions, IAI found support just below the 170 level, forming a four-month trading range. There are two ways a security can correct overbought conditions — through time (by moving sideways) or through price (by pulling back sharply). In this case, IAI has had utilized the former, consolidating sideways and thereby resetting its technical setup after making that last high in July. This prolonged base-building has now given IAI another legitimate shot at a sustained breakout — and so far, it’s holding above that breakout level. Looked at through a classical pattern lens, the last few months can also be viewed as one large cup-and-handle bullish continuation pattern. This setup, if it completes, would project the ETF considerably above its former high point. We often talk about how, when one bullish pattern works, it can lead to additional formations taking shape in the weeks and months ahead. That would be the best-case scenario for IAI, of course — if this breakout attempt holds. The reason rotation is so important is that it allows us to identify opportunities not only on an absolute basis but also relative to the S & P 500. The relative chart of IAI versus the S & P 500 — dating back to the start of 2024 — illustrates this clearly. Along the way, the ETF has done a good job outperforming the index, though not consistently. As the chart shows, there have been periods of underperformance, particularly over the past several months. Two key technical criteria have historically helped IAI regain leadership, marked on the chart: When the relative ratio becomes oversold or near oversold (vertical blue lines), and… When that ratio breaks above a steep downtrend line (shown in green). Each time this combination has occurred recently, it has led to strong risk – reward opportunities. On the three prior occasions, IAI went on to outperform the market for months — and sometimes much longer. This is the first time such a setup has appeared since March of this year, and because it follows a prolonged period of underperformance, the case can be made that IAI may be setting up for a more extended snapback phase this time around. Of course, IAI’s future path depends directly on its underlying components, especially its largest holdings. These six stocks represent over 50% of the ETF’s total weight, giving them a major influence on whether this breakout holds or fails. As it stands, five of the six names are either making new all-time highs today or are very close to doing so. The one laggard is S & P Global (SPGI) , which has started to rebound but still has a ways to go. While much of the attention naturally falls on the major brokerage firms — notably Goldman Sachs and Morgan Stanley — there are other important players as well. S & P Global provides critical market data, CME Group represents the Chicago Mercantile Exchange, Charles Schwab remains one of the largest retail brokers, and the newer addition, Robinhood (HOOD) , happens to be one the best-performing S & P 500 stock year-to-date (currently +240%). In other words, it’s a mix of non-bank financials doing much of the heavy lifting here. For the breakout in IAI to truly gain traction, we’ll need to see continued strength and participation from each of these subgroups — data providers, exchanges, and brokers alike. — Frank Cappelleri Founder: DISCLOSURES: None. 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