Tuesday, July 13, 2010

Nice Bounce, But Where Is The Volume?

Last Tuesday I sent an email out with the following -

“(F)rom a technical perspective the highest probability is a reversal in the next couple of days.”

“Will this simply be an oversold relief bounce or something more? …Will the bounce be strong, or merely a weak bounce into moving averages that can be shorted?”

Volume on the rally has been terrible and now the Market Averages are at key resistance. That is the trait of a Bear Market. The S&P 500 ($SPX) has made a vertical move into resistance on declining volume (Red Line). The same goes for the NASDAQ ($COMPQ).

Here are some important sectors. Consumer Discretionary (XLY) and Financials (XLF) have both bounced for the fourth time in recent months. Each of these bounces has been on declining volume into resistance. Maybe this time is different…

Retail (XRT) and Home Builders (XHB) have both had weak bounces on imploding volume and look like they are just consolidating before another leg lower in a sustained downtrend. Trends are trends until they break, and they usually go a lot farther than you think they can go.

These are important sectors. They tend to top out early and serve as an early warning sign for economic weakness and Bear Markets. They peaked in 2006 and 2007 and led the whole way down last time.

Here are some key stocks. These stocks are a huge percentage weighting of the Market Indexes and very important to the economy. All Microsoft (MSFT) has done is get stretched too far below its 50-day average (Black Line and Arrow) and bounce – again, on weak volume. That is the definition of a Bear Market! The same goes for Walmart (WMT).

General Electric (GE) held $15 for nine months and then broke below it in June. It bounced on very light volume and could only get above $15 by gapping above it at the open today – probably to try and trigger a short squeeze. But a failure here would be really, really, really bearish.

Chevron (CVX) has also simply bounced into resistance on horrible volume.

Volume is critical, because it tells you what the big boys are doing with their money. Weak volume means that they aren’t buying and that they are more likely simply moving prices higher, so they can unload more shares. That is the definition of distribution.

Before you get into Bear Markets, the big boys sell for months. They sell just enough to not break prices down completely. Prices sit in narrow ranges, until one day they break and then a flood of selling starts. Prices regress back to moving averages and then another leg of selling starts.

That is what has me so concerned about what is going on with the S&P 500. Nine months of a trading range that sees rallies into the 50-day on weak volume and then support gets broken, followed by a rally on weak volume.

This is yet another make or break point for the markets. A pullback that tests 1,010 and holds gets me excited again. A pullback that breaks 1,010 and next support is 950. Pretty sobering stuff.