GAP MARKS RESISTANCE -- MIRROR IMAGE CHARTS -- VIX FIRMS AT BREAKOUT -- FINANCE SECTOR CONTINUES TO LAG -- MEASURING RELATIVE STRENGTH AND WEAKNESS -- CISCO FORMS CONSOLIDATION -- BIG PHARMACEUTICAL STOCKS SHOW STRENGTH

TURNED BACK AT THE GAP... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor

Stocks retreated on Wednesday with big techs leading the way lower. The Nasdaq 100 ETF (QQQQ) met resistance from the late February gap and fell around 1% today. I have been talking about this gap for a few weeks and it continues to cause trouble. QQQQ formed a rising wedge over the last few weeks and met resistance around 44.5-44.8. The rising wedge is a potentially bearish pattern that forms as a corrective advance. Corrective advances retrace a portion of the prior decline and form lower highs. The current advance retraced over 62% of the prior decline, but has yet to exceed the late February high and could still qualify as a corrective advance. Confirmation is the key. The wedge is still rising and a little more downside is needed to actually reverse the five week uptrend. Look for QQQQ to break the lower wedge trendline and late March low to complete a reversal. SPY has a similar pattern working and the same analysis applies.

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REVERSE ANGLE REPLAY... There are a number of inverse or short ETFs now trading and these can be used to get another angle on the price chart. As the name implies, the Short QQQQ ProShares (PSQ) moves counter to the Nasdaq 100 ETF (QQQQ) and the chart offers a mirror image of QQQQ. In theory, a bearish setup in QQQQ should look like a bullish setup in PSQ. Let's see how it turns out. We have already seen the QQQQ chart above and the February gap/breakdown dominates the chart. The Short QQQQ ProShares (PSQ) established support around 59.5-60 from November to February. The ETF then surged above resistance with a gap and high volume advance in late February. This looks like a clear breakout. PSQ pulled back in March and found support near the late February gap. Looks familiar. The trend over the last five weeks is down, but the ETF bounced today and this affirms support around 61.25. Look for a break above the late March high to reverse the five week downtrend and call for a continuation of the February breakout.

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VIX FINDS SUPPORT... While stocks declined on Wednesday, the S&P 500 Volatility Index ($VIX) bounced off support to keep its February breakout alive. Volatility usually expands during declines and the VIX shot higher when stocks declined in late February. The indicator broke above the 50-day and 200-day moving averages and exceeded resistance at 12-13. Broken resistance and the moving averages then converged and turned into support during March. Despite a few tests, support held and the 50-day crossed above the 200-day two weeks ago. This is bullish for the VIX and the last "golden cross" occurred in May 2006, which was not a good time for stocks. Traders and investors should keep an eye on the VIX because it represents the fear factor. A rise in volatility equates to a rise in fear and an increase in fear equates to an increase in selling pressure.

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FINANCE SECTOR REMAINS A DRAG... The Finance sector is the signal biggest sector in the S&P 500. As such, relative strength or weakness in this key sector will undoubtedly affect the S&P 500 and the market as a whole. Key components of this sector include banks, brokers and REITs. Banks form the backbone of the financial system, brokers are at the heart of the stock market and REITs represent the real estate market. The Finance SPDR (XLF) led on the way down to the early March lows and is lagging on the current rebound. In contrast to the S&P 500, the Finance SPDR (XLF) remains well below its late February gap and late March high. This shows relative weakness and the S&P 500 is not going far with Finance dragging its feet. XLF needs to clear the 50-day moving average and late March high to get the bulls back on track. The Broker Dealer iShares (IAI) also shows relative weakness as it remains below the late February gap and 50-day moving average. The REIT iShares (IYR) broke down in February and remains below its 50-day moving average.

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USING THE PRICE RELATIVE TO COMPARE PERFORMANCE... The price relative provides an easy way to measure the relative strength or weakness of a stock. In this example I am comparing the Finance SPDR (XLF) to the S&P 500 ($SPX). The price relative rises when XLF outperforms and falls when XLF underperforms. Notice that even though XLF showed some strength in March, the price relative continued lower throughout the month. The indicator forged yet another lower low in April and the Finance sector remains out of favor on Wall Street.

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CSCO EXTENDS CONSOLIDATION... Cisco (CSCO) has been consolidating the last few weeks and the direction of the breakout is likely to reverberate throughout the tech sector and Nasdaq. The stock declined sharply with the rest of the market in late February and then moved into a consolidation over the last six weeks. Bollinger Bands have been overlaid and the narrowing of these bands shows decreasing volatility. This often foreshadows a volatility expansion, but the Bands do not provide a directional clue. For direction we need to wait for the break. A move above 27 would be bullish and stoke the Nasdaq bulls, while a break below 25 would be bearish and weigh on the Nasdaq.

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PFIZER AND MERCK ON THE MOVE... While the Finance sector shows relative weakness and lags the market, pharmaceutical stocks have shown relative strength and are leading the market. John Murphy pointed out the new high in the Pharma HOLDRS (PPH) on Tuesday and I am seeing strength in Merck and Pfizer as well. In particular, Merck (MRK) is on the verge of a breakout and 52-week high. The stock has been stuck in a trading range since November with support around 42 and resistance around 46. MRK gapped on 2-April and this gap is holding. Pfizer (PFE) is not as strong as Merck over the last six months, but the stock managed to recover after a weak open today and advance seven days straight. Moreover, the advance recaptured the 50-day and 200-day moving averages. A break above the upper triangle trendline would be the icing on the cake.

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