SANDISK SELLOFF WEAKENS CHIP AND TECHNOLOGY STOCKS AND SINKS MARKET'S ATTEMPT TO CLOSE OVER 200-DAY AVERAGE -- SMALL CAPS MAY BE ROLLING OVER AT CHART RESISTANCE -- LOWER BOND YIELDS SUGGEST SOME MONEY MAY START FLOWING BACK INTO BONDS AND GOLD

SANDISK DROP UNDERMINES CHIP ... A big afternoon drop in SanDisk undermined a morning rally in semiconductors. Chip selling spread to the Nasdaq and the rest of the market by the close. Chart 1 shows SanDisk falling -7.5% today on the heaviest volume in a month. By day's end, most chip stocks were in the red. Chart 2 shows the Semiconductor (SOX) Index closing lower today and just a shade over its 200-day average. The 14-day RSI has touched the overbought 70 level for the first time in a year. That suggests an overbought reading in this technology-leading group. The 12-day Rate of Change (ROC) line below Chart 2 also shows some weakening in SOX short-term momentum. Another down day would put it back below its 200-day average. The late selloff also made the Nasdaq the day's weakest index.

Chart 1

Chart 2

NASDAQ AND S&P 500 STRUGGLE AT 200-DAY LINES... Today's late selloff prevented the Nasdaq Composite and S&P 500 indexes from closing over their 200-day moving averages. In the case of the Nasdaq, most of the day's selling came during the afternoon selloff as opposed to the morning rally. That's a sign of weakness. The 12-day Rate of Change (ROC) lines show the same short-term "negative divergence" as on the SOX Index. [A negative divergence exists when prices hit a new high while the ROC is dropping]. That suggests that there may be more profit-taking in store for the two-month rally. This is a logical spot for that to happen. In addition to both indexes testing their 200-day averages, the Nasdaq is also up against resistance at its November low at 2550.

Chart 3

Chart 4

SMALL CAPS WEAKEN ... The Russell 2000 Small Cap Index fell today and backed off from its 200-day average. The RUT also backed down from chart resistance along its August/November lows. Those are formidable resistance barriers. [Former support levels become resistance barriers]. It's also retraced half of its October/March decline which is a logical spot for new selling to reappear. Its ROC line is showing negative divergence as well. With financial and consumer discretionary stocks on the defensive once again, this could be a moment of truth for the two-month rally.

Chart 5

BOND YIELDS BACK OFF ... Another factor that may work against the market over the short-run is the fact that the 10-Year T-Note Yield is starting to back off from chart resistance at its February high (and its 200-day line). Bond yields have been moving up since mid-March as money moved out of bonds and into stocks. [Falling bond prices push bond yields higher]. In other words, bond yields and stocks have been moving in the same direction. That being the case, any failure by bond yields here could mean that short-term money is moving out of stocks and back into bonds. Lower bond yields would also weaken the dollar and give a further boost to gold and other commodities which rose today.

Chart 6