Five charts that show why this is a 'critical week' for the markets

The charts are pointing to a critical week for the market, according to Katie Stockton, chief technical strategist at BTIG.

“The S&P 500 (^GSPC) is testing some important resistance on the chart,” she said

. Stockton sees a downtrend channel with upside resistance around 2,090 in the index, with a break above that price indicating the market’s recent rally is sustainable.

“We did see a close above that level last Friday and now that breakout is pending confirmation on a strong close this Friday,” she said. “This week holds a lot of weight because of that. If we do see a breakout, it would take a more bullish tone for the market from a longer-term perspective.”

Likewise, the small cap Russell 2000 (^RUT) index has also had a rally in recent weeks, gaining 7% in the past month alone. “During this relief rally

up to the 200-day moving average,” Stockton said, “we've seen some outperformance by small caps versus large caps. That outperformance is typically generated in early short covering rallies, and now I believe it will probably peter off if we see the S&P 500 stall near resistance on its turn around that 2,090 level.”

But having the small caps outperform the large caps is not necessarily a good sign for the overall market, Stockton warned. Charting the ratio of the Russell 2000 to the S&P 500, she notes the small cap index outperformed the large cap index last year.

“Unfortunately this environment actually gave way to a top in the broader market,” she said. “While I think it's natural to be inclined to think that small cap outperformance is bullish, in reality, it isn't always bullish for the broader market and it isn't always sustainable beyond the short term.”

Stockton also notes the financial sector ETF (trading under the symbol XLF) is also outperforming the S&P 500. In recent weeks, the ETF formed a “double bottom” pattern relative to the broader index.

“That suggests that maybe the outperformance is sustainable,” she said. “However, I would say it's too early to say that the financial sector is in the clear for a long-term outperformance because the measure faces a whole lot of resistance starting around previous lows up to the 200-day moving average. So, [they are] hardly free and clear, but [there are] certainly some early indications of outperformance by financials which could really be the key to the sustainability of the rally if indeed we do see the breakout from the downtrend channel.”

One factor that may be causing these sectors to outperform is the relative weakness of Apple (AAPL) in recent weeks. The tech giant is down 7% in the past month – most of it caused by Wednesday’s selloff. Apple comprises 3.3% of the S&P 500.

Stockton sees Apple’s underperformance as representing a rotation out of the technology sector.

She is watching the $92 level for Apple’s shares. “We don't want to see the stock take out that level,” said Stockton. “That would increase downside risk. But certainly already it's been exhibiting weak momentum and of course weak relative strength as well.”