DOW JONES INDUSTRIAL AVERAGE FAILS TO HOLD BREAKOUT LEVEL -- S&P 500 FALLS BELOW SUPPORT AS WELL -- THE NASDAQ FINDS RESISTANCE AT THE 50 DMA -- NASDAQ COMPOSITE IS PART WAY THROUGH A POTENTIAL TOPPING STRUCTURE

DOW JONES INDUSTRIAL AVERAGE FAILS TO HOLD BREAKOUT LEVEL... The Dow Jones Industrial Average ($DJIA) has been the strongest of the 4 main indexes recently. On Thursday, the Dow was unable to hold its breakout level. It pushed down to the 50 Day Moving Average (50 DMA). The rally which started last Wednesday (May 7) could not hold up. At this point we can label it as a failed breakout. What is concerning is the number of times it tried to exceed this zone of resistance at 16500 and 16600. Failing to hold above the resistance level for longer than 3 days after working so hard to break out seems to confirm the Nasdaq as the directional leader.

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Chart 1

S&P 500 FALLS BELOW SUPPORT AS WELL... The Large Cap S&P 500 ($SPX) had the same breakout failure pattern on April 4th. After pushing up one day above the previous highs and closing the day at a new high, the market was unable to add to the move on the following days. The up trend line shows support at 1855-1860. There is also horizontal support at 1840-1850. The MACD is also showing a lot of divergence so that is bearish. The 200 DMA which would be considered long term support rests at 1785.

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Chart 2

THE NASDAQ FINDS RESISTANCE AT THE 50 DMA... When we compare $DJIA and $SPX charts to the Nasdaq Composite ($COMPQ), the divergence between new highs and lower highs has increased since March. Both the Russell 2000 ($RUT) and the Nasdaq Composite have been unable to make new highs in April or May. The market weakness shown in the Nasdaq on Chart 3 had moved many of the indicators down to levels where strong bounces start from. I covered that off in last Thursday's Market Message. We had also seen some increased strength in the Nasdaq 100 ($NDX) over the Nasdaq Composite. We needed the composite to start improving to confirm the uptrend. That has not happened. The fact that the market is unable to build any breakout power here, combined with the bond market strength, and seasonal weakness suggests this downward move might have more to run. John covered the bond market strength yesterday in his market message. Click here to see that message. Wednesday Market Message

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Chart 3

NASDAQ COMPOSITE IS PART WAY THROUGH A POTENTIAL TOPPING STRUCTURE... The Nasdaq Composite ($COMPQ) currently has many signals related to a topping structure. Chart 4 shows the current view of the Nasdaq Composite. First of all, the megaphone pattern identified by the blue lines. When a market continues to make new highs it is in an uptrend. The difficulty comes when it is also making lower lows which is associated with a downtrend. This creates a megaphone pattern. Part II of the topping structure occurs when the index starts testing the 200 DMA and can not get back above the 50 DMA. The next stage (Part III) is the 50 DMA starts to turn down and the index falls below the 200 DMA. The final phase (Part IV) to watch for in a structure is the failure of the chart to move back above the 200 DMA after retesting from below. This has to happen in order for a downtrend to commence. So far, the $COMPQ is trapped between the 200 DMA as support and the down sloping 50 DMA as resistance. How this resolves is crucial. If the $COMPQ index moves below the 200 DMA again, this will make the 50 DMA and 200 DMA overhead resistance levels rather than support levels during the uptrend.

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Chart 4

RUSSELL 2000 FINDS INTRADAY SUPPORT AT THE FEBRUARY LOW LEVEL... The Russell 2000 is farther along in a topping process. Today's low has pushed slightly below the February 5th low as shown on Chart 5. The Russell 2000 is also below the 200 DMA. Over the next few weeks, the $RUT will have to push to get back above the long term average. Should it fail to, that usually marks the time when the market would accelerate to the down side. If it can get back above the 200 DMA, traders that were expecting bigger moves down usually have to cover their short positions which creates bullish momentum.

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Chart 5

HOMEBUILDERS AND $LUMBER CHARTS ARE BELOW THE 200 DMA... The Homebuilders confidence index came out this morning and it was at the lowest levels in a year. The Homebuilders ETF (XHB) shown on Chart 6 is below the 200 DMA and Lumber ($LUMBER) is confirming the weakness. $LUMBER has been unable to push back up through the 200 DMA so far as seen on Chart 7. This level is also horizontal resistance as well as resistance at the trend line across the lower highs. If these charts can break through to the upside, this would change the trend at a very important test point on the charts. Failing to push back up above these important resistance levels would be a sign of weakness. $LUMBER has both the 50 DMA and the 200 DMA showing a downward direction. Downward sloping moving averages are a quick demonstration of weakness. Bullish investors usually get better returns when both moving averages have a positive slope.

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Chart 6

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Chart 7

WALMART GAPS DOWN ON EARNINGS... Walmart (WMT)gapped down on earnings this morning. Today, Chart 8 shows a significant pull back. Walmart is an excellent proxy for retail demand, especially for lower incomes. The long term monthly chart (Chart 9) of Walmart looks very good with the current price close to long term highs. WMT is such a large company that it is hard to generate huge growth drivers that can meaningfully change the bottom line. Weak retail demand is showing up in quite a few retailers. Walmart was no exception. Sometimes the consumers move to Walmart instead, but it seems to be weakness across the retailers.

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Chart 8

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Chart 9

CISCO GAPS UP ON EARNINGS... Cisco (CSCO) also reported earnings and they were slightly positive. On a weak tape today, CSCO had a significant push higher as shown on Chart 10. On a long term chart (Chart 11), Cisco is moving into an area where resistance has stopped the upward rally. Will it be different this time?

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Chart 10

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Chart 11

Back to back days of downward markets make the new highs from earlier this week look less likely to be repeated soon. The push up on Monday, the small sideways move Tuesday, the pullback yesterday, and finally the breakdown today makes the market look really weak. Tomorrow is options expiration which can be a big turning date for the markets. The rally off the lows today in both the Nasdaq and the Russell 2000 were hopeful, however we appear to have a lack of buyers at new highs.
Good trading,
Greg Schnell, CMT