PRICE AND VOLUME ACTION PUSH STOCK MARKET DEEPER INTO CORRECTION -- DOW AND S&P 500 BREAK 50-DAY AVERAGES -- NASDAQ BEARS DOWN ON 200-DAY LINE AND MAY DETERMINE DEPTH OF DOWNTURN -- WEEKLY NASDAQ INDICATORS AREN'T ENCOURAGING

DOW AND S&P 500 FALL BELOW 50-DAY LINES... [Note: Although this message was posted earlier this afternoon, charts have been udpated to reflect closing prices]. The week's combination of falling prices in heavy trading is a bad combination. With small caps and the Nasdaq turning down earlier, it was just a matter of time before the rest of market rolled over. We've been pointing out the fact that the Dow was up against chart resistance at its January high and was starting to weaken. Chart 1 shows the Dow Industrials slipping below its 50-day line today. The Dow has held up better than other stock indexes because it's composed of large blue chips that pay dividends and are perceived to be safer. Chart 2 shows the S&P 500 falling below its March low and 50-day line in heavy trading. That turned its short-term trend lower. Chart 3 shows the Russell 2000 Small Cap Index ($RUT) nearing an important test of its February low and 200-day line .

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Chart 1

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Chart 2

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Chart 3

NASDAQ NEARS FEBRUARY LOW... The tech-dominated Nasdaq market has been leading the rest of the market lower since early March. Chart 4 shows the Nasdaq Composite index ($COMPQ) nearing two important tests. One is its early February low (see line), and the other is its 200-day average (red arrow). The ability (or inability) of the Nasdaq to hold above those two support lines will help determine the severity of the current downturn. Two of the weakest Nasdaq groups have been biotech and Internet. Both are already at a critical chart point. Chart 5 shows Biotech iShares (IBB) testing its 200-day moving average. Chart 6 shows the First Trust Dow Jones Internet Fund (FDB) doing the same. Whether or not those two groups can hold above that long-term support line should help determine Nasdaq direction over the next few months.

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Chart 4

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Chart 5

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Chart 6

NASDAQ HAS LED THE MARKET HIGHER SINCE 2002... The lost decade for stocks began with a 2000 collapse in the Nasdaq market as the dot.com bubble burst. Since market bottoms were formed at the end of 2002 and the spring of 2009, however, the Nasdaq has been a market leader. Chart 7 shows the Nasdaq Composite (blue line) gaining 245% since the October 2002 bottom versus an S&P 500 gain of 124%. Since the March 2009 bottom, the Nasdaq gain of 201% was nearly twice as much as the SPX gain of 117%. So Nasdaq direction is very important to the rest of the market. Relative weakness in the Nasdaq during March and April has weakened the market's short-term trend. Chart 8 shows the Nasdaq/SPX ratio falling sharply since March and breaking a yearlong support line. That has weakened the market's short-term trend. The bigger question is how vulnerable is the Nasdaq to more serious losses, and the rest of the market with it.

Chart 7

Chart 8

NASDAQ RALLY IS FIVE YEARS OLD AND OVERBOUGHT... The monthly bar chart for the Nasdaq Composite reveals at least three things of importance. First, the 14-month RSI line (top of chart) has been at the most overbought level over 70 since 2000 when it peaked. In addition, the RSI is starting to slip below 70. That makes the Nasdaq the most vulnerable since the last bull market began in March 2009. The second point is that the Nasdaq hit its fifth anniversary last month from that March 2009 bottom. That's a mature bull that's probably in need of consolidation or correction. That also matches the length of the previous bull leg that started in October 2002 and ended on its fifth anniversary in October 2007 (see boxes). The third thing of importance is that the Nasdaq may be completing a Wave 3 from its 2002 bottom. The rising Wave 1 lasted five years from late 2002 to late 2007. A corrective Wave 2 lasted from late 2007 to spring 2009. The third wave up (3) started in March 2009 and may be ending. There's good and bad news in that. A Wave 4 can take the form of a downside correction, or a sideways consolidation (like a triangle). The good news is that bull markets usually have five waves. Which means that any 2014 correction or consolidation is still part of longer-term uptrend and most likely would represent a major buying opportunity. But the next few months may be a lot more volatile before we get to that point.

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Chart 9

WEEKLY INDICATORS LOOK TOPPY... It's usually not that serious when short-term daily indicators turn down. It is more serious when weekly indicators do so. Which is why Chart 10 has me worried. The weekly bars in Chart 10 show the Nasdaq Composite in an uninterrupted advance since a 12% correction near the end of 2012. The Nasdaq is headed down for a test of initial chart support at its early February intra-day low (3968) and its 40-week moving average (red arrow). Basic chart analysis holds that closes below those two support lines would signal a more serious correction. Its weekly indicators aren't encouraging. The 14-week RSI line (top of chart) has suffered the biggest drop in more than a year. In addition, weekly MACD lines (below chart) have suffered the biggest drop since 2012. That suggests that the current downturn has the potential for being more than a short-term pullback. How much more? The green horizontal lines show Fibonnaci retracement levels measured from the 2012 bottom. They usually act as support levels. The top two lines (38% and 50%) would represent Nasdaq corrections of 13% to 18%. That's well within the realm of possibility for a midterm election year correction. And, as the Nasdaq goes, so goes the rest of the market.

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Chart 10

BOND YIELDS ARE LEADING STOCKS LOWER... The fact that bond yields are falling isn't good for stocks, because bond yields and stocks are positively correlated. Both fall when investors are pessimistic. Chart 11 shows the 10-Year Treasury Note Yield and the S&P 500 peakng at the start of the year. Stocks hit a new high at the start of April while yields were falling. That divergence is good for bonds, but not stocks. The TNX has broken a support line drawn under October/first quarter lows (lower circle). At the same time, the SPX is starting to roll over (upper circle). Chart 12 shows the Barclays 20+Year Treasury Bond iShares (TLT) rallying to the highest level in ten months. Bond prices usually rise when stocks fall. Investors are buying bonds to protect against a more serious stock slide. Falling bond yields also increase the appeal of dividend-paying stocks that are more defensive in nature -- like consumer staples and utilities. Some cash is good too.

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Chart 11

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Chart 12

STOCKS CLOSED NEAR THE LOWS OF THE DAY AND THE WEEK...WE'LL REVIEW THE WEEK'S ACTION OVER THE WEEKEND....