| NASDAQ, Russell 2000 hit resistance |
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| Written by Our Staff Writer |
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March 3, 2010: NASDAQ 100 and Russell 2000, the indices leading the markets up, hit resistance yesterday and formed a bearish pattern, putting bulls on notice. A fall in the leading indices can take the broad market lower. We will analyze the exchange traded funds (ETFs) of the S&P 500 (which is SPY), the Dow (DIA), the NASDAQ 100 (QQQQ) and Russell 2000 (IWM) to track the indices. We use the ETFs instead of the indices as the ETFs have volume and show price action more accurately.First of all let's identify the leading and lagging indices in the percentage change chart below. It is clear that IWM and QQQQ have led the markets up since the March 2009 lows. Hence it's safe to assume that market will stop rising or fall, once these two indices turn. The percentage change chart also shows DIA and SPY lagging the IWM and QQQQ. Now let us switch over to the price chart of the IWM and QQQQ to see their reaction at resistance. The blue boxes on the IWM and QQQQ charts show resistance, as prices fell from those areas earlier this year. As prices returned to it yesterday, notice that they formed topping tails, which is a bearish sign. A topping tail is formed by strong selling pressure and prices are unable to sustain a rally. Even though IWM went above the resistance area marked by the blue box, it closed inside the blue box at the end of the day. This may mean that a lot of break out traders who bought when prices went above resistance are now trapped and potential sellers. The fact that the topping tails on the IWM and QQQQ occurred near an area of resistance indicates that prices may move lower. Additionally, notice that the rally in the two ETFs from February of this year has been on falling volumes. Technically speaking, lower volumes with rising prices indicates a weak rally. Finally, let us look at the impulse and correction sequence of the ETFs. Notice that the ETFs took 17 days to fall but 25 days to rally back up, which shows that the rally is not as powerful and the sell off. The days are shown by the white lines on the price chart. These facts say it's time to book at least some of our profits on the long side and not take any more long positions. We would also move our stop losses higher to lock in profits. The area of the stop loss could be just below the 50-day moving average shown by the green line. We'd would also initiate some short positions to profit if the market sells off. Caveat If prices close above the blue boxes on IWM or QQQQ chart the market can continue to rise. Chart Analysis
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