Stock Market Rallies Continue to Lack Conviction

| September 3, 2010

The S&P 500 index is now up more than 5% following the latest cycle low on August 31, but the rally has been accompanied by below average volume once again. Every oversold reaction that has developed since the cyclical uptrend from early 2009 peaked in late April has occurred on relatively low volume, indicating a lack of conviction.

Granted, trading volume tends to be light in general during the summer months, but there was a meaningful increase in volume during the violent declines of the correction in May and June, which is indicative of a primary downtrend attempting to reassert itself. Now that volume will be returning to the stock market over the next two weeks, we expect to see a decisive move that provides an important signal with respect to long-term direction. If the increase in volume results in downward pressure that drives the S&P 500 below the July low near 1,022, a new cyclical downtrend from late April would be confirmed and a relatively fast move down to congestion support in the 950 area would become highly likely. On the other hand, if the volume increase engenders a breakout well above the recent high at 1,128, the imminent long-term breakdown scenario would become less likely and a move up to the April high would be forecast. Our computer models continue to greatly favor the breakdown scenario at the moment, but it is important to keep in mind that the situation is fluid and can change quickly. As always, there are no certainties in the financial markets, only possibilities and their associated probabilities. Whatever the outcome, September is shaping up to be an important and interesting month, so it will be necessary to monitor market behavior closely.

Category: Commentary, Market Update

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