A Time for Caution

by Darrin Donnelly on October 17, 2011

Click on chart to enlarge.

On the surface, this market appears to be in the middle of a major bull run.  Key phrase: “on the surface.”

Over the past nine trading sessions, the NASDAQ has rocketed to a 16% gain off of the low it set on October 4th.  It has retaken the 50-day moving average line and jumped past the previous resistance level of 2600 with no signs of trouble.  The other major indices have acted similarly.  The S&P 500 broke through its previous resistance level of 1220 on Friday and closed the week above that key mark.

However, when you look below the surface of price action alone, you’ll notice one glaring problem with this recent rally attempt: there is VERY light volume behind this move.

While the NASDAQ finished in the green each day last week, every session occurred on volume that was well below average.  In fact, volume on the NASDAQ last week was the LOWEST OF THE YEAR for a week that was not shortened by a holiday!

In other words, volume isn’t just light, it’s historically low right now.

What is the reason for such low volume?

It appears that the big institutional money is taking a “wait and see” approach.  These institutions are waiting on the sidelines for the European debt crisis to resolve itself and also to digest the latest round of earnings.

This hesitation should not be ignored.

Weak-volume rallies should be approached with extreme caution.  They often have a way of reeling in excited traders just before a forceful pullback.

Until we see some strong volume coming in on the upside – both in the general market and for individual leading stocks – we’ll remain in a Neutral Trend.

A Neutral Trend is a “yellow-light” environment and even though we have the o.k. to buy into Darvas Stocks that give us proper breakouts, initial positions should be kept smaller than normal – until we enter a healthier Uptrend environment.

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