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SMALL CAPS AND NASDAQ SHOW RELATIVE WEAKNESS

John Murphy

John Murphy

Chief Technical Analyst, StockCharts.com

It's usually a bad omen for the market when small caps and technology stocks are underperforming -- as they're doing at present. Chart 1 shows the Russell 2000 Small Cap Index trading closer to its July low than its July high. Its falling relative strength line also shows small-cap weakness. The same is true for the technology-dominated Nasdaq market. Chart 2 shows the Nasdaq Composite meeting resistance at its (blue) 50-day average (having never closed the overhead resistance gap formed last week). It's also dangerously close to breaking support near 2150. Its falling relative strength shows it leading the S&P 500 lower. A big reason for the Nasdaq underperformance can be seen in Chart 3 which shows the Semiconductor (SOX) Index having already broken its summer low. Notice the steep drop in its RS line since mid-August. Semiconductor weakness is usually bad for the Nasdaq which is bad for the rest of the market. That increases the odds for more stock selling.

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John Murphy
About the author: is the Chief Technical Analyst at StockCharts.com, a renowned author in the investment field and a former technical analyst for CNBC, and is considered the father of inter-market technical analysis. With over 40 years of market experience, he is the author of numerous popular works including “Technical Analysis of the Financial Markets” and “Trading with Intermarket Analysis”. Before joining StockCharts, John was the technical analyst for CNBC-TV for seven years on the popular show Tech Talk, and has authored three best-selling books on the subject: Technical Analysis of the Financial Markets, Trading with Intermarket Analysis and The Visual Investor. Learn More