NASDAQ IS TESTING CHART RESISTANCE WHILE IN AN OVERBOUGHT CONDITION -- ENERGY ETFS REACH NEW RECORDS

AN IMPORTANT TEST ... The Nasdaq Composite Index is undergoing an important test of overhead chart resistance. And it's doing so in an overbought condition. That's an important test not only for the Nasdaq but the rest of the market as well. Chart 1 shows the Nasdaq right up against chart resistance formed at the start of the year just below 2200. The 9-day RSI line is in overbought territory (over 70) for the second time since the start of June. That creates a short-term negative divergence. Given how stretched the Nasdaq is on a short-term basis, some profit-taking is likely at current levels. If the Nasdaq does start to weaken, that could cause profit-taking in the rest of the market as well. That's because the Nasdaq has been leading it higher since May. That can be seen in the rising Nasdaq/S&P 500 ratio line (below the price chart) which is also starting to soften a bit. Today's move to new highs by energy stocks may also contribute to some profit-taking in the market.

Chart 1

ENERGY ETFS REACH NEW RECORDS ... Energy stocks are hitting new records again. Chart 2 shows the Energy Sector SPDR (XLE) hitting a new high today. Its relative strength line is about to do the same. The recent pullback bounced off chart support at its early March peak near 45 before resuming its uptrend. The Oil Service Holders (OIH) in Chart 3 have done even better. The OIH pulled right back to chart support at 100 before resuming its uptrend on Friday. Upside volume is supporting the strong price action. While new highs by energy stocks (and energy sector leadership) is good for the oil patch, it's normally not good for the rest of the market. That may also contribute to some nervous selling in an overbought market.

Chart 2

Chart 3