DOWNSIDE BREADTH HITS AN EXTREME - QQQQ FORMS RISING WEDGE ON 30-MINUTE CHART IWM RETRACES 62% OF MONDAY'S DECLINE QQQQ REMAINS OVERBOUGHT ON DAILY CHART IWM HITS CHANNEL TRENDLINE

SELLING PRESSURE INTENSIFIES... Even though the major-index ETFs (QQQQ,SPY,IWM, DIA) are in clear uptrends, they are also overbought and ripe for a correction or a consolidation. As noted on Monday, prior pullbacks were limited to two days as stocks recovered quite quickly. Monday's decline was sharp, but just one day and stocks rebounded on Tuesday. Is this a dead-cat bounce or the start of a correction? Downside breadth on Monday was actually quite strong. Charts 1 and 2 show Net Advances dipping to their lowest level since early March and hitting bearish extremes on Monday (red arrows). Selling pressure was intense. Also notice that Nasdaq volume surged with Monday's decline. Net Advances on Tuesday's rebound fell short of their prior highs and the bulls may be loosing their punch. With the bears showing more strength on Monday's decline, Tuesday's bounce is looking like a dead-cat bounce.

Chart 1

Chart 2

QQQQ FIRMS AFTER GAP... Stocks were hit hard on Monday as the major-index ETFs gapped down and stayed down the entire day. There was a recovery bounce on Tuesday, but a bearish consolidation could be taking shape with the gap zone offering resistance. Chart 3 shows 30-minute bars for the Nasdaq 100 ETF (QQQQ). I would like to point out three features. First, the trend is still up as QQQQ advances with higher highs and higher lows. Second, the ETF gapped down and stayed down on Monday. Third, the ETF stabilized after the gap with a rising wedge recovery on Tuesday. A break below wedge support would open the door to the next support zone around 31.25-31.50. Keep in mind that this is a 30-minute chart and a short-term scenario.

Chart 3

IWM BOUNCES AFTER SHARP DECLINE... Chart 4 shows the Russell 2000 ETF (IWM) with similar characteristics. IWM remains in an uptrend with higher highs and higher lows over the last few weeks. The ETF gapped down and tested last week's low with a sharp decline on Monday. In fact, IWM and small-caps bore the brunt of selling pressure on Monday. Tuesday's bounce was sharp, but the gap remains as a potential resistance zone. Also notice that IWM retraced around 62% of Monday's decline. If Tuesday was a dead-cat bounce, then I would expect this bounce to fail near the gap and retracement.

Chart 4

DOUBLE BOTTOM FOR QQQQ... While the short-term looks precarious, Chart 5 shows a double bottom breakout for the Nasdaq 100 ETF (QQQQ). Technically, this pattern is bullish with a projection towards 38. The height of the pattern (~6) is added to the breakout (~32). Despite this bullish pattern, the ETF is overbought after a 30% advance in the past six weeks (March low to April high). Moreover, QQQQ is up 30% without a meaningful correction or consolidation. There are two ways to work off overbought conditions: trade flat with a sideways consolidation or correct with a pullback. At the minimum, I would expect a correction that retraces 38% the Mar-Apr advance. Such a move would target a pullback to the 30.5 area.

Chart 5

IWM HITS CHANNEL TRENDLINE... The Russell 2000 ETF (IWM) stole the show during the March-April rally. IWM surged some 38% from the March low to the April high. Heck, this would be a spectacular gain for a year. Like SPY and QQQQ, IWM is clearly stretched after such an advance and has yet to correct or consolidate. In addition to overbought conditions, IWM is trading at the top of a falling price channel. I drew the lower trendline first and then drew the upper trendline parallel. Extending from the January high, the upper channel trendline marks resistance just above 47.5.

Chart 6