MARKET SUFFERS DOWNSIDE REVERSAL ON HIGHER VOLUME -- NASDAQ 100 HAS BIGGEST DROP -- SMALL CAPS FAIL FIRST TEST OF SUMMER HIGH

SMALL CAPS FAIL FIRST TEST OF OLD HIGH ... Earlier today I showed the S&P 600 Small Cap Index testing its summer high at 445 and suggested that was an important test for the rest of the market. It was. And its 1.1% selloff from that resistance may have been enough to cause a downside reversal in large cap stocks. And on rising volume. Chart 2 shows the NYSE Composite Index closing lower after hitting a record earlier in the day. The noticeable pickup in volume is troubling and suggests there may be more profit-taking to come. Small caps were among the day's biggest losers along with transports and technology. The only winners were gold, oil, and utilities. The Nasdaq 100 took the biggest hit.

Chart 1

Chart 2

NASDAQ 100 SUFFERS DOWNSIDE REVERSAL DAY ... Among the major market indexes, the Nasdaq 100 suffered the day's biggest loss (-1.5%). A higher open followed by a lower close constitutes a short-term downside reversal day. The fact that the day's price range was wide -- and volume very high -- adds to the bearish day. In fact, trading in the QQQQ was the highest in two months. The fact that it's happening with the RSI in overbought territory over 70 also suggests that a setback is in store. The QQQQ had been leading the market higher. Today it led it lower. Semiconductors were the day's biggest tech casualty. The SOX fell 2.2% and ended below its 200-day line (Chart 4). It's usually not a good idea to place too much importance on one day's action. Given all of the negative divergences that we've been showing, however, and with the market in an overbought condition, it's not a good idea to ignore them either.

Chart 3

Chart 4

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