Nasdaq Weakness Confirms: Pullback Begins

 

Over the past week I’ve been warning about the relative weakness I was starting to see in the Nasdaq, and today we finally saw that weakness begin to play out. Above is a daily chart of QQQ, with SPY in the lower pane for comparison, and the divergence really couldn’t be clearer to me. Last week SPY pushed to a fresh high, showing continued strength in the broader market. QQQ, on the other hand, failed to confirm that move. It did not make a new high, and that non-confirmation was the first real warning sign that something was off beneath the surface.

Whenever I see one major index making new highs while another lags behind, I start paying very close attention. Markets don’t usually top all at once, and leadership often starts to narrow before we see a pullback. That’s exactly what I felt was happening here. I mentioned last week that as long as minor support held, the market could continue chopping higher. But I also said that once that support was taken out, it would act as a trigger for a potential downside move.

That trigger came today. QQQ broke below last week’s low at 614.56, and to me that’s a meaningful technical development. This break confirms the relative weakness that was already showing up on the chart. In my opinion, this move marks the beginning of a pullback in the market. I’m not looking for a crash, and I’m not pounding the table on a major bear market. What I do see is an overdue reset after an extended run higher.

What’s important now is where the relative strength is showing up. While QQQ is breaking support, IWM has continued to act much better. Small caps have been holding up and, in some cases, pushing higher while the Nasdaq rolls over. That’s the index I want to focus on going forward. If the market is going to pull back, I want to be aligned with the areas that are still showing strength.

For anyone who wants more background, you can read my original post from last week titled: Relative Weakness in QQQ Signals Caution, Not Panic where I first outlined these concerns.