BLUE CHIPS AVERAGES NEAR OLD HIGH ON LIGHT VOLUME - NASDAQ 100 STILL NEEDS TO CLIMB OVER 50-DAY AVERAGE -- WHY THE QQQQ/SPY RATIO NEEDS TO GET OVER ITS 20-DAY AVERAGE

DOW DIAMONDS NEAR OLD HIGH ... Chart 1 shows the Dow Diamonds nearing a test of their late December high. What remains suspicious is the absence of volume. If you look at the green volume bars since this rally began at the start of February, you'll see that they've remained on the low side. Contrast that with the market advance in early December, which was accompanied by much bigger volume bars (see circle). The combination of light volume, and a short-term overbought condition, may make it difficult for the Dow to break into new high ground. The good news is that the DIA is well above its 20- and 50-day moving average lines which could provide support on any pullbacks.

Chart 1

S&P 500 SPDRS ALSO LACK VOLUME... The volume situation is similar in the S&P 500 SPDRs. A glance at the volume bars over the last month shows that upside volume has been diminishing as prices have been rising. That's not a sign of bullish enthusiasm. Here again, contrast that light volume with the situation in early November when the SPY started to rally. Notice the big volume bars on that advance. That suggests to me that the market may have a tough time breaking into new high ground.

Chart 2

NASDAQ 100 STALLS AT 50-DAY AVERAGE... The Nasdaq 100 Shares (QQQQ) backed off from the 50-day average today. But at least it closed higher and on increasing volume. And most of the volume was to the upside. In fact, volume was the heaviest in three weeks. It's just possible that some money is starting to rotate out of the blue chips and back into the Nasdaq market which has been a laggard for the last three months. I'm watching the QQQQ/SPY ratio line very closely. It's been falling since the start of December. But it's started to jump a bit this week and is close to crossing over its 20-day moving average. If it does that, it will be the first time it's been over that line in two months. That's normally good for the whole market. The next two charts show why that's the case. They also show why that blue moving average line is important on the ratio chart.

Chart 3

S&P 500 DOES BETTER WHEN QQQQ IS IN THE LEAD... The next two charts compare the S&P 500 SPDRS (SPY) in Chart 4 to a ratio of the Nasdaq 100 Shares (QQQQ) divided by the SPY in Chart 5. The blue line on the ratio chart is the 20-day EMA (exponentially smoothed moving average). The circles in Chart 6 show the last three times the ratio line crossed under or over its moving average line. The QQQQ/SPY ratio fell under its 20-day EMA in early July and late December (see red circles). That coincided with downturns in the S&P 500 (see red arrows). The ratio crossed over its 20-day EMA in late August/early September (green circle). That coincided with an upturn in the S&P 500 (green arrow). The message is this. The QQQQ/SPY ratio needs to cross over its 20-day EMA to support the recent rally in the S&P 500. Until it does, the S&P may have a tough time moving into new high ground.

Chart 4

Chart 5