SPY HITS RESISTANCE AS MACD RISES IWM AND QQQQ HOLD THEIR GAPS BBBY SURGES ON HUGE VOLUME RETAIL SPDR HITS 200-DAY TECHS AND SMALL-CAPS SHOW LEADERSHIP STOCKS TO WATCH (AGILENT, FLOUR, KING PHARMA AND APPLIED MATERIALS)

RESISTANCE COMING INTO PLAY... While this rally may have further room to run, a breather may be in order as resistance levels come into play on a number of charts. As noted last week, stocks became overbought after big advances in March. There are two ways to alleviate overbought conditions: correct with a pullback or consolidate with a trading range. Chart 1 shows the S&P 500 ETF (SPY) hitting a potential resistance area from the 62% retracement and the prior consolidation (yellow area).

Chart 1

The bottom indicators show two versions of MACD. The bottom window shows the traditional MACD, which is the 12-day EMA less the 26-day EMA. A 9-day EMA is used as the signal line (red). The other window shows a faster MACD because the short moving average is shorter (5-day versus 9-day) and the long moving average is longer (35-day versus 26-day). Shorter moving averages are faster and more sensitive because they have fewer data points. Longer moving averages are slower and smoother because they have more data points. The MACD (5,35,10) moved above its signal line in early March and remains above its signal line. Even though resistance is at hand and SPY is overbought, the rally is largely holding as long as MACD continues to rise. A move below the signal line would be negative, while a move into negative territory would point to a correction in SPY.

QQQQ AND IWM HOLD GAPS... Chart 2 shows the Russell 2000 ETF (IWM) with characteristics similar to SPY. The ETF is at a potential resistance zone from the 62% retracement mark and the middle of the triangle consolidation. Chart 3 shows the Nasdaq 100 ETF (QQQQ) battling resistance from the January-February highs. With a modest gain today, QQQQ is back above the resistance zone. Both ETFs sport gaps from last Wednesday. IWM pulled back into the gap on Tuesday, while QQQQ held its gap with a consolidation the last four days. These gaps show strength as long as they hold. A move below last Tuesday's close would fill these gaps and increase the chances of a correction or extended consolidation.

Chart 2

Chart 3

BBBY POWERS UP RETAIL ... The retail group got a big boost from Bed Bath & Beyond on Wednesday. Chart 4 shows Bed Bath & Beyond (BBBY) surging almost 25% with volume exceeding 39 million shares. This is easily the highest volume of the year. In fact, volume was the highest in over 10 years. Obviously, Wall Street was quite impressed with the company's earnings report today. With around 259 million shares outstanding, today's volume accounted for around 15%. Simply amazing. On the price chart, BBBY surged back above its 200-day moving average. The stock is now testing its September highs and becoming overbought.

Chart 4

RETAIL SPDR HITS THE 200-DAY... The Retail SPDR (XRT) continues to lead the overall market as it challenges its 200-day moving average. I should also note that this 200-day moving average is falling and the 50-day moving average remains below the 200-day. While the rally over the last 4-5 months looks impressive, it could be one big correction, such as an Elliott ABC correction. Chart 5 shows Wave A forming in Nov-Dec, Wave B forming in Jan-Feb and Wave C carrying the ETF to its 200-day moving average. The 50% retracement joins forces with the 200-day moving average to create a resistance zone around 24-25. XRT is up over 50% from its November lows, but has only retraced half of the prior losses (Sep-Nov). Even though the surge over the last few weeks was quite strong, the ETF looks vulnerable as it trades near potential resistance after a 33% advance in just five weeks.

Chart 5

TECHS AND SMALL-CAPS LED THE RALLY... Relative strength can be measured by comparing charts or percentage gains. As John Murphy noted on Tuesday, the tech-laden Nasdaq was the first major index to cross above its 50-day moving average. This shows relative strength. In addition, the Technology SPDR (XLK) was the only sector SPDR to move above its January-February highs. Chart 6 shows XLK breaking to new highs for the year with a big surge last week. None of the other eight sectors even came close to recording new highs for the year. This further confirms relative strength for tech stocks. Small-caps are also leading as the Russell 2000 ETF (IWM) sports the biggest percentage gain since early March. Chart 7 shows IWM with three other major-index ETFs. IWM was up a whopping 30% as of last week. QQQQ and SPY were next in line with 22-23% gains, but fell well short of the 30% mark. With the biggest percentage gains, small-caps showed relative strength from early March to early April.

Chart 6

Chart 7

AGILENT STALLS AT 50-DAY... Chart 8 shows Agilent (A) with a pennant consolidation at the 50-day moving average. After a big surge above 16, the stock became overbought and consolidated the last two weeks. Volume declined as this consolidation unfolded. A break above pennant resistance would signal a continuation higher.

Chart 8

FLOUR BREAKS FLAG RESISTANCE... Chart 9 shows Flour (FLR) with a flag breakout on strong volume. The stock surged in early March and then corrected with a falling flag back below 35. With a gap up five days ago, the stock broke flag resistance on above average volume. Even though this gap is holding, the stock is stalling around the 50-day and has yet to fully follow through.

Chart 9

APPLIED MATERIALS HITS RESISTANCE... Chart 10 shows Applied Materials (AMAT) hitting resistance for the second time in as many weeks. The stock surged above 11.5 in late March and again in early April. However, there was no follow-through to complete the breakout. The stock fell back sharply on Tuesday with expanding volume.

Chart 10

KING PHARMA SURGES ON BIG VOLUME... Chart 11 shows King Pharmaceuticals (KG) with a pennant breakout on big volume. In what looks like a selling climax, the stock plunged below 6.5 with high volume in early March. There was a very sharp recovery above 7 with 5 days of strong upside volume. The stock then formed a pennant consolidation and broke resistance with another surge in volume.

Chart 11