QQQQ DECLINES AFTER STRONG OPEN MONEY ROTATES INTO DEFENSIVE SECTORS THREE HEALTHCARE LEADERS NASDAQ IS LAGGING THE NY COMPOSITE SMALL-CAPS ARE LAGGING LARGE-CAPS NET NEW HIGHS FAIL TO IMPRESS

SELLERS GREET STRONG OPEN... The Nasdaq 100 ETF (QQQQ) signaled that something was amiss when it opened strong and immediately moved lower for the second day running. Chart 1 shows the Nasdaq 100 ETF (QQQQ) with 15 minute candlesticks over the last four days. QQQQ opened strong with a gap above 35 on Wednesday (6-May), but immediately moved sharply lower. The ETF rebounded throughout the day Wednesday and again opened strong today. However, opening strength was again met with immediate selling pressure as QQQQ broke below Wednesday's low with a sharp decline this morning. Chart 2 shows QQQQ with RSI. Notice that 14-day RSI moved above 70 to become overbought earlier this week. I would not interpret this as a sell signal, but rather a warning that the rally was getting overextended. Overbought conditions can be worked off with either a consolidation or a correction. Should QQQQ take the correction route, we could see a pullback towards broken resistance, which turns into support around 31.5. In addition, the Fibonacci Retracements Tool shows that a 38% retracement of the March-May advance would extend to the 31.5 area. We may also look for a pullback to the 40-50 zone for RSI.

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DEFENSIVE SECTORS SHINE... With techs and the other offensive sectors retreating on Thursday, money rotated into the defensive sectors. In afternoon trading, the Healthcare SPDR (XLV) showed the biggest gain. The Consumer Staples SPDR (XLP) and Utilities SPDR (XLU) were also bucking the overall trend with small gains. Chart 3 shows the Healthcare SPDR (XLV) breaking consolidation resistance with a big gain today. Chart 4 shows the Utilities SPDR (XLU) breaking consolidation resistance on Monday and edging higher today. Chart 5 shows the Consumer Staples SPDR (XLP) also breaking consolidation resistance earlier this week. Despite these breakouts, their price relative lines are still below the red trendlines. All three lagged during the broad market advance of the last two months. While a break above these trendlines would be positive for these three defensive sectors, it would be negative for the overall market because it would show a new preference for defense over offense.

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HEALTHCARE CHART LEADERS... The next three charts single out a few healthcare stocks showing recent breakouts. Chart 7 shows Johnson & Johnson (JNJ) breaking flag resistance with a surge over the last seven days. The December-February highs mark the next resistance zone around 60. Chart 8 shows Pfizer (PFE) also breaking flag resistance with a surge over the last three days. Chart 9 shows Eli Lilly (LLY) with a break above its March high this week. Notice that LLY is the only one of the three to break its March high. This shows relative strength - relative to JNJ and PFE that is. The next resistance area is around 40. For homework, I would suggest looking at volume for LLY and perhaps a few volume indicators.

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TECHS LAGGING NON-TECHS... The Nasdaq is starting to lag the NY Composite. These two broad indices are good to compare because there are very few stocks with dual listings. In other words, there is little overlap. The Nasdaq is, of course, tech heavy, while the NY Composite is a broad index with heavy weightings in the financial and consumer discretionary sectors. Chart 10 is divided into two parts. The bottom half shows the Nasdaq (black) and the NY Composite (red) together. The top half shows the price relative, which shows Nasdaq performance relative to the NY Composite. This is the key part. Notice that the price relative moved sharply lower over the last few days. The NY Composite is up over 5% the last five days, but the Nasdaq is up less than 1%. Suddenly the Nasdaq is not keeping pace and techs show relative weakness. This is not a good sign for an overbought stock market.

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SMALL-CAPS LAGGING LARGE-CAPS ... Chart 11 shows the same setup with the Russell 2000 ETF (IWM) and the S&P 100 ETF (OEF). The Russell 2000 ETF represents small-caps, while the S&P 100 ETF represents large-caps. Notice that small-caps led the rally from early March until late April as the price relative moved steadily higher. There was a short-sharp decline in early April (orange area) and now a short-sharp decline in early May (yellow). The S&P 100 ETF is up around 4.3% over the last five days, but the Russell 2000 ETF is up just 2.5% over this same timeframe. A smaller gain over the same timeframe reflects relative weakness. As with the Nasdaq assessment above, sudden relative weakness in small-caps is not a good sign for an overbought stock market.

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WHERE ARE THE NEW HIGHS?... Despite a huge rally over the last two months, the number of new 52-week highs is barely outpacing the number of new 52-week lows. Chart 12 shows Net New Highs for the Nasdaq, while Chart 13 shows Net New Highs for the NY Composite. Net New Highs equals new 52-week highs less new 52-week lows. Net New Highs plunged deep into negative territory in early March, but recovered by the end of the month. In fact, Net New Highs actually turned positive for a few days at the end of March. The yellow area shows a period when Net New Highs oscillated above and below the zero line. The Nasdaq and NY Composite were still moving higher, but the 1-2 day pullbacks were pushing Net New Highs into negative territory. Talk about touchy. Furthermore, I am not impressed with the overall number. Both the Nasdaq and the NY Composite advanced some 38%, yet, Net New Highs are barely in positive territory. This indicator could easily turn negative with a sharp decline in the indices  like today.

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FOCUSING ON NET NEW HIGHS ... Charts 14 and 15 hone in on these indicators with a shorter timeframe. Net New Highs for the NYSE peaked on April 9th, but the NY Composite kept right on advancing throughout the month. In fact, the index advanced over 9% from April 9th until early May. Despite this sizable advance, Net New Highs did not expand and did not break above their prior high (April 9th). This is negative because participation did not broaden as the NY Composite advanced. For the Nasdaq, Net New Highs reached 21 on April 2nd and 22 on April 29th. This is a net expansion of +1. In contrast, the Nasdaq advanced over 9% in this same timeframe. The inability of Net New Highs to significantly expand after a 9% advance is negative.

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