QQQQ HOLDS RESISTANCE BREAKOUT -- MICROSOFT, INTEL AND DELL LEAD TECHS HIGHER -- FINANCIALS WEIGH ON NY COMPOSITE -- DOW INDUSTRIALS AND DOW TRANSPORTS TEST AUGUST LOWS

QQQQ FINDS SUPPORT AT BROKEN RESISTANCE... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

The Nasdaq 100 ETF (QQQQ) found support near its resistance break on Tuesday and bounced with a modest advance on Wednesday. Chart 1 shows the ETF surging above resistance with a strong move in early August. Once broken, resistance turns into support. This is a basic tenet of technical analysis. In addition to support from broken resistance, a 50% retracement of the July-August advance marks potential support around 46. QQQQ formed a doji on Tuesday to signal indecision at this support area. Today's bounce reinforces support at 46 and traders should watch this level for signs of weakness.

Chart 1

MICROSOFT, DELL AND INTEL LEAD... Now there's a blast from the past. Microsoft (MSDT), Dell (DELL) and Intel (INTC) led tech stocks on Wednesday. Chart 2 shows Microsoft with a surge above the April trend line in early August and a falling flag over the last 2-3 weeks. This falling flag is potentially bullish. A move above 28 would break flag resistance and argue for further strength. Chart 3 shows Intel surging from mid July to mid August and breaking resistance at 22.5 in the process. This broken resistance level turned into support over the last few days. Chart 4 shows Dell as the strongest of the three. Dell broke resistance in early August and then consolidated the last few weeks. With the today's high above 25.75, Dell hit a new high for 2008. Not many stocks can make this claim and Dell is showing relative strength.

Chart 2

Chart 3

Chart 4

NY COMPOSITE LAGS NASDAQ ... One of the big anomalies since mid July has been the blatant underperformance of the NY Composite. While the Nasdaq shot higher from mid July to mid August, the NY Composite never got lift off and wallowed near its July lows. Chart 5 shows the NY Composite/Nasdaq ratio (price relative) and then both indices. The price relative has been moving higher the last six months as the Nasdaq outperforms the NY Composite. In the bottom window, the red line shows the NY Composite trading flat since mid July and the Nasdaq zooming higher. These two are clearly not related.

Chart 5

NY COMPOSITE SECTOR WEIGHTINGS ... A look at the sector composition of the NY Composite reveals the two main culprits (Chart 6). Information from the table below was taken from the NYSE website. As you can plainly see, the financial sector is the single biggest sector (20.51%) and the main culprit. Relative weakness in financials has been a drag on the NY Composite since May. The second culprit is the low weighting of the technology sector. At a mere 5.47%, it is the second smallest sector. As the QQQQ and Nasdaq charts above showed, the technology sector moved sharply higher from mid July to mid August. However, the NY Composite did not benefit from strength in technology because of the low weighting assigned to the sector.

Chart 6

NY COMPOSITE FORMS TRIANGLE ... Chart 7 shows the NY Composite over the last four months. While the Nasdaq and QQQQ show some promise with their August surges, the NY Composite is not faring so well. After a sharp decline from May to mid July, the index bounced and then formed a triangle. Notice that the index peaked on 23 July and then traced out lower highs throughout August. There was no follow through to the mid July surge and this should be disconcerting for the bulls. At the very least, it shows a serious disconnect between two big indices. Watch the triangle boundaries for the next signal. An upside breakout would be bullish, while a downside break would signal a continuation of the May-July decline.

Chart 7

WATCHING THE AUGUST LOWS ... Support from the August lows holds an important key for many stocks, ETFs and indices. In particular, Charts 8 and 9 show the Dow Industrials and Dow Transports. Both Averages formed rising wedge patterns and then broke below their lower trend lines. These patterns are similar to the bear wedge John Murphy pointed out in the S&P 500 on Monday. Despite these trend line breaks, both bounced off their August lows to reinforce support here. A break below support from the August lows would be bearish and would signal a continuation of the prior declines.

Chart 8

Chart 9