NASDAQ CORRECTING FROM RESISTANCE BARRIER -- BOLLINGER BANDS CONTRACT

NASDAQ PULLS BACK FROM 2100 ... One of the reasons that the market rally remains stalled has to do with the inability of the Nasdaq Composite to get through its February/March highs at 2100. With the Nasdaq having moved into a short-term overbought condition, that was a logical spot to expect some profit-taking to emerge. So far the pullback has been relatively mild and has taken place on light volume. The relative strength ratio shows why the Nasdaq pullback has caused the overall market rally to stall. Since the start of May, the rising ratio line meant that the Nasdaq was leading the S&P 500 higher. This week's dip in the ratio means the opposite. Temporary loss of Nasdaq leadership has caused the market rally to stall. Chart 1 shows chart support near 2025 which was the early April high. Chart 2 shows closer support at the 20-day moving average.

Chart 1

BOLLINGER BAND WIDTH NARROWS ... Chart 2 applies Bollinger bands around the Nasdaq Composite. On this chart, initial chart support is possible at the dashed 20-day moving average (blue arrow). That will be the first line of defense on the current pullback. One way to tell when a correction or consolidation is starting is to measure Bollinger band width. That's the line plotted below Chart 2. When the bands are expanding, prices trends are more likely. When the bands start to contract, a pullback or consolidation usually starts. The recent downturn in the band width (second gray arrow) suggests that the latter is the case. The last time band width peaked was in late January (first gray arrow). That marked the end of the January decline and the start of a a six-week sideways pattern. Upturns in the band width signal the start of short-term trends; downturns usually mark their end. That also supports the idea that the market rally has stalled at least for the time being.

Chart 2