Maybe Lower Volume Levels Recently Are a Good Thing?

I have heard a lot of market commentators complaining lately about the daily volume on the major exchanges. Their argument is based on the notion that the recent rallies have not been accompanied by strong volume levels, and as such the rally attempts are suspect.

I beg to differ with those arguments, as I think the recent declines in trading volume may be a good thing, as it is setting us up with another potential breakout to higher levels. And it is on that breakout that I want to see volume levels increase. That would be a more bullish sign.

On the chart above, you can see that I have drawn two horizontal lines, one at SPX 925 and the other at SPX 950. The SPX first broke above that 925 level on June 1. This was also its first foray above the 200-day moving average in over a year. Resistance came in around SPX 950, an area that has been tested a few times so far, including again this morning.

You can see that for the last week and half the S&P 500 has traded within this tight range. I would call the recent action a consolidation of the thrust that took the SPX from its prior 880-925 trading range into this new range. And during consolidation phases, we want to see volume levels recede, just as they have been. So I have no issue with the light volume levels in recent trading sessions.

The next event that I would watch for is the potential breakout above SPX 950. I have been saying for a while now that if the market didn't rollover and have a bit of a correction soon, then it could lead to a situation where underinvested portfolio managers have their hands forced and rush to add equity exposure into quarter end, which could lead to another thrust higher in the market.

As of now, this pattern seems to be coming to fruition, but as traders we don't want to anticipate the breakout until we see it. So keep an eye on that SPX 950 level, and on a true break above that level, we will want to see the move accompanied by a rise in volume. That would be textbook.

Disclosure: no positions in companies mentioned

Comments

[Larry House:]

It would be more bullish if it turns out that way, but that is doubtful. Sometimes you just have to call a spade a spade. It can't always be a golden shovel. Everything is bullish now, right? What a stretch!

Jun 10 04:20 PM

[Tomcat101:]

I thought the treasury auction's poor results today would have caused more excitement than it did. SP went down a whopping 1% or so and then gained most of it back by the end of the day. No big deal. What's it gonna take to scare these people? I'm starting to think that Russia could invade Alaska, oil go to $600 a barrel, Obama drop dead of a heart attack, and an asteroid hits Washington D.C. and this market would continue to rally.

I think that this joy and euphoria will quickly dissipate in the near future when we see the toll that high gas and high mortgage rates are taking on the fragile consumer. It's just a matter of how long it takes to start showing in some key reports. Then this massive game of musical chairs comes to a screeching halt. Don't get caught chairless.

Jun 10 06:25 PM

[mtt04:]

no what it really means is the smart money has left the building and only the traders are left trading against each other.

Be careful here folks - something is amiss.

Jun 10 08:16 PM

[Jordan Kahn:]

I am not saying everything is golden, just that the price action looks like it could resolve itself on the upside


On Jun 10 04:20 PM Larry House wrote:

> It would be more bullish if it turns out that way, but that is doubtful.
> Sometimes you just have to call a spade a spade. It can't always
> be a golden shovel. Everything is bullish now, right? What a stretch!

Jun 11 12:56 PM