STOCK MARKET DIGESTS ITS GAINS -- DOW INDUSTRIALS AND S&P 500 REMAIN ABOVE 200-DAY LINES -- THE NASDAQ 100, HOWEVER, IS STILL TESTING THAT RESISTANCE LINE -- BIOTECHS HAVE BEEN THE BIGGEST DRAG ON THE NASDAQ -- GILEAD SCIENCES IS STILL IN DOWNTREND

DOW AND S&P 500 HOLD ABOVE 200-DAY LINES... Given the size of the market rally since mid-February, it's not surprising to see it spend the past week consolidating. While the market had its first down week after five up weeks, very little changed on the charts of major stock indexes. Chart 1 shows the Dow Industrials still trading well above its 200-day moving average (red arrow). That red line should provide support on any pullback from here. The 14-day RSI line (top of chart) is pulling back from overbought territory over 70. That argues for more stalling in the market uptrend. Chart 2 shows a similar picture for the S&P 500. While those large cap indexes are trying to stay above their 200-day lines, some other indexes are trying to climb above theirs.

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Chart 1

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Chart 2

NASDAQ 100 TRUST TESTS 200-DAY LINE... For a market rally to continue, it has to have most market indexes rallying with it. A number of them aren't there yet. Chart 3 shows the PowerShares QQQ Trust struggling with its 200-day line. In a strong uptrend, the technology-dominated QQQ usually shows upside leadership. That hasn't been the case. The QQQ/S&P 500 ratio (top of chart) shows the QQQ lagging behind. That needs to change if the market is going to make more upside progress. When dealing with the Nasdaq market, however, it's necessary to see what's holding it back. The QQQ includes the largest 100 non-financial stocks in the Nasdaq market. Not surprisingly, technology is its biggest component (56%). The next two biggest components are consumer discretionary (20%) and healthcare (12%). Let's compare their chart patterns to see what's holding the QQQ back.

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Chart 3

TECHNOLOGY ISN'T THE PROBLEM ... Chart 4 shows the Technology Sector SPDR (XLK) trading just shy of its fourth quarter high, and well above its 200-day line. The QQQ/SPX ratio (top of chart) is in record territory. That suggests that Nasdaq underperformance isn't because of the technology sector. It isn't consumer discretionary stocks either. Chart 5 shows the Consumer Discretionary SPDR (XLY) trading above its 200-day line. The XLY/SPX ratio (top of chart) is consolidating after a strong February. That's not where the Nasdaq problem is either.

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Chart 4

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Chart 5

THE PROBLEM IS HEALTHCARE... Healthcare (the third biggest part of the QQQ) is the year's weakest sector (-5.7%). Chart 6 shows the Health Care SPDR (XLV) still in a downtrend as measured by its 200-day average and a falling trendline drawn over its July/December highs. The XLV/SPX ratio (top of chart) recently hit the lowest level in a year. The two biggest groups in the XLV are pharmaceuticals and biotechs. Of those two groups, biotechs are the year's biggest loser (-24%) versus a pharma loss of -12%. Not only are biotechs the weakest healthcare group, the largest biotech stocks are traded on the Nasdaq. That includes Amgen (AMGN), Gilead (GILD), Celgene (CELG), and Biogen (BIIB). That makes biotechs the biggest drag on the Nasdaq 100.

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Chart 6

BIOTECHS STILL IN DOWNTREND... The daily bars in Chart 7 show the downtrend in Biotech iShares (IBB). The IBB has lost -40% since last July. The red line is a ratio of the IBB divided by the QQQ. The falling red line shows how much of a weight the IBB has been on the Nasdaq 100 ETF. The IBB has been moving sideways since February (and is in an oversold condition). It may be encouraging that biotechs gained 3% this week to lead healthcare to the week's top sector. But the IBB will have to clear its March high and its 50-day average to turn its short-term trend higher. That would be a big help to the QQQ and the entire Nasdaq market.

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Chart 7

GILEAD SCIENCES TRYING TO REBOUND... Gilead Sciences (GILD) is one of the biggest stocks in the IBB and the biggest biotech stock in the QQQ. The daily bars in Chart 8 show GILD reaching a two-month high, but still within a major downtrend. Its 14-day RSI (top of chart) and daily MACD lines (below chart) are moving higher, which is encouraging. The stock, however, would have to clear the falling trendline drawn over its August/October highs to significantly improve its trend picture. That would be a big help to the biotech group and the QQQ, and maybe even the healthcare sector.

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Chart 8

SMALL AND MIDSIZE STOCK INDEXES TEST 200-DAY LINES... A stock market can't advance for long with only large cap stocks in uptrends. That's why the next two charts are important. Chart 9 shows the S&P 400 Mid Cap Index ($MID) testing its 200-day average (red line) and a trendline drawn over its June/December highs. That's a formidable test. The solid line shows the MID/SPX ratio rising since January, which is encouraging. Chart 10 shows a the S&P 600 Small Cap Index ($SML) backing off from its 200-day line. There gain, the SML/SPX ratio (solid line) shows small caps doing better than large caps since the February bottom. That usually happens when investors start to turn more optimistic. Both stock indexes, however, need to clear those overhead barriers if the overall market is going to make more upside headway. That makes their current test of resistance (along with the QQQ) very important for the market as a whole.

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Chart 9

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Chart 10

HAPPY EASTER ...