NASDAQ 100 ETF STALLS NEAR JULY HIGH -- MICROSOFT SHOWS RELATIVE WEAKNESS -- UTILITIES SURGE WITH FED RATE CUT -- PG&E AND EXEL LEAD UTILITIES HIGHER -- HEALTHCARE SPDR RECAPTURES 200-DAY -- MERCK AND SCHERING LEAD HEALTHCARE

QQQQ HITS RESISTANCE AT 50... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor

The Nasdaq 100 ETF (QQQQ) surged with the rest of the market on Tuesday and then stalled around resistance at 50 on Wednesday. Resistance in this area stems from the July high. Despite resistance, the current swing remains up as the ETF holds the August trendline and Monday's closing low. In other words, Tuesday's big gain is important and it is important that it holds. This also holds for the rest of the major index ETFs. A move below Monday's close would erase Tuesday's big gain and reverse the current upswing. In addition to resistance, I noticed a rather sharp negative divergence in the Stochastic Oscillator this month. While QQQQ closed above last week's high, the Stochastic Oscillator (%K) did not even make it back above 80 and remains below its signal line (%D), which is the 3-day EMA of the Stochastic Oscillator. Further weakness below 50 would be bearish for this indicator and such a move could be used to confirm a close below 48.8 in QQQQ (Monday's closing low). The bulls have the edge as long as the indicator holds above 50 and the ETF holds 48.8.

Chart 1

MICROSOFT WEIGHS ON TECHS ... Microsoft (MSFT) managed to rally on high volume with the rest of the market on Tuesday, but failed at a key resistance area and declined sharply today. On the daily chart, Microsoft worked its way back to the 50-day and 200-day moving averages this month and then fell back today. The decline occurred on high volume and this reinforces resistance around 29.25. Look for a break above this level to revive the bulls and open the door to the July highs. The advance over the last 4-5 weeks looks like a rising flag and these are potentially bearish patterns. The stock declined to the lower flag trendline and a break below this trendline would open the door to further weakness.

Chart 2

On the weekly chart, MSFT could be forming a large double top with support from the March low. A break below this low would confirm the pattern and project further weakness towards the 2006 lows. The bottom indicator shows the price relative, which compares MSFT with the Nasdaq 100 ETF (QQQQ). The price relative peaked in January and has been moving lower the entire year. This tells us that Microsoft is underperforming its large tech brethren and this is quite negative.

Chart 3

UTILITIES SURGE ON LOWER INTEREST RATES... Utility companies carry lots of debt and this makes the group sensitive to interest rates. The double cut from the Fed increases the prospects of lower interest rates in the future and this will help the bottom line for utilities. Accordingly, the Utilities SPDR (XLU) surged over the last two days and broke above its August highs. On the weekly chart, XLU advanced from April 2006 until May 2007 and then corrected with a 50% retracement to around 37. The minimum retracement expected is 38.2% and the maximum is 61.8%, both of which are Fibonacci numbers. 50% is in the middle of this zone. The decline also formed a falling price channel (blue trendlines) and the ETF broke the upper trendline with a surge over the last two weeks.

Chart 4

On the daily chart, a real battle took place around the 200-day moving average in August. The 50-day declined towards the 200-day and the ETF surged just as the 50-day neared the 200-day. There is a ton of support around 38.5-39.5 and I would expect this level to hold. The volume-by-price indicator shows a lot of trading in this area and this also confirms support here.

Chart 5

PG&E AND XCEL LEAD UTILITY STOCKS... PG&E (PCG) formed a Diamond consolidation and broke above its August high over the last few days. The Diamond represents a volatile consolidation and the signal is dependant on the direction of the breakout. The right half of the Diamond is a Symmetrical Triangle and the break above the August highs provides a new directional bias. Also notice that upside volume was strong from mid August to mid September. This is in sharp contrast NYSE and Nasdaq volume during the same time frame. Above average volume validates the breakout and the May highs mark the next resistance area.

Chart 6

Xcel Energy (XEL) is another utility leader and the stock broke above its July-August highs. Like PCG, the stock consolidated during July-August and then broke resistance with above average volume over the last two weeks. The resistance breakout at 21.5 is bullish until proven otherwise and there is a support zone around 21-21.5. A strong breakout should hold and a move back below 21 would call for a reassessment.

Chart 7

HEALTHCARE SPDR RECOUPS 200-DAY... The weekly chart for the Healthcare SPDR (XLV) sports a pattern similar to that seen on the XLU chart. XLV advanced from June 2006 to June 2007 and then retraced 50% of that advance with a retracement back to around 33. There is also support around 33-34 from the October 2006 high and March 2007 low. The ETF firmed for four weeks with high volume and then moved back above the 40-week SMA this week. 40 weeks is equivalent to 200 days. The ETF also broke the June trendline and this breakout signals a continuation of the long-term uptrend.

Chart 8

On the daily chart, XLV broke back above both the 50-day and 200-day moving averages with the surge over the last few weeks. Volume in late August was strong, but tapered off over the last few weeks. I am marking a support zone around 34.2-34.8. A strong breakout should hold and a move below the early September low would call for a reassessment.

Chart 9

PHARMA STOCKS LEAD HEALTHCARE... Merck (MRK) is leading XLV higher with a breakout at 51. The stock held up better than the S&P 500 in August and this relative strength is paying off today. Notice that MRK held support around 48 in August, but the S&P 500 broke to new lows. The ability to hold up showed less weakness and this can also be interpreted as relative strength. MRK tested support around 48 from June to September and this represents a nice base from which to launch a breakout.

Chart 10

Schering Plough (SGP) is also showing some strength with a consolidation breakout at 31. The stock did not hold up as good as Merck in August, but rebounded and broke above the upper fork line on Andrew's Pitchfork. The stock consolidated after the breakout (orange rectangle) and broke consolidation resistance today. This calls for a continuation higher and the May highs mark the next resistance area.

Chart 11