BIG DROP IN MICROSOFT CAUSES NERVOUS SELLING IN NASDAQ MARKET -- RSI LINE FOR THE NASDAQ 100 IS OVERBOUGHT FOR FIRST TIME SINCE SPRING BOTTOM -- THE QQQQ HAS RETRACED HALF OF ITS BEAR TREND AND IS NEARING OVERHEAD RESISTANCE

MICROSOFT FALLS NEARLY 10% ON BIG VOLUME ... A nearly 10% drop in Microsoft is causing some profit-taking in the market today. Because of its huge size, Microsoft carries a lot of weight in the Nasdaq market which is leading today's profit-taking. Chart 1 shows MSFT gapping down nearly 10% today on very heavy volume. At the very least, the stock may threaten its 50-day moving average and initial chart support near 22. It's important that those supports hold. If they don't, more profit-taking may be in store for it and the market. Chart 2 shows another tech casualty. Broadcam is also tumbling 10%. Amazon.com is down 8% (Chart 3). Although no serious damage has been done to any of those stocks, today's selling may be enough to cause some profit-taking in an overbought market. That's especially true in the Nasdaq.

Chart 1

Chart 2

Chart 3

NASDAQ 100 IS OVERBOUGHT AND NEARING RESISTANCE ... The Nasdaq 100 Power Shares (QQQQ) has led the recent advance in the rest of the stock market and its uptrend is still intact. Its 14-day RSI line on the top of Chart 4, however, is in overbought territory (over 70) for the first time since this rally started. That's a warning of a short-term over-extended market. If a pullback does ensue, initial chart support should be evident along its summer high near 37. The longer-term chart of the QQQQ also carries a warning that its advance may be nearing some overhead resistance. The weekly bars in Chart 5 show that the QQQQ is nearing a potential resistance barrier just above 40 (see circle) which was the bottom hit during first quarter 2008 (broken support usually become overhead resistance on subsequent rallies). A falling trendline drawn over the 2007/2008 highs comes into play around the same level. The horizontal blue lines in Chart 5 show that the 40 level also represents a 50% retracement of the two-year downtrend. All of those factors suggest that the QQQQ has risen too far too fast since the spring and may be in need of a breather. That suggests some caution in putting new money into the QQQQ at current levels.

Chart 4

Chart 5