Volume Continues to Wane as Indices Get Closer to Key Resistance Levels.

Includes: DIA, QQQ, SPY
by: Tate Dwinnell

After two days of very orderly selling with light selling volume the bull looked ready to charge again with ferocity. The set up was there and the bull charged but it was a half hearted, tired attempt at resistance levels of the major indices. How could I make a statement like that on a day the Dow rose nearly 200 points with volume higher than the day before (technically accumulation)? Volume continues to wane as we get closer to key resistance levels. I want to see massive buying before I'm convinced the market has hit a longer term bottom rather than a short term pause point in a bear market. I'm not there yet.

The market continues to focus on the positive news as it brushed aside the Fannie Mae (FNM) dividend cut and cheered the ADP employment report as well as increased productivity and factory orders. The market is also pricing in some kind of a Fed cut and imminent news of some government meddling into the subprime mess. Fortunately the meddling won't be sweeping according to the New York Times:

The agreement, to be formally announced Thursday by President Bush, is expected to contain numerous limitations that would exclude many — if not most — subprime borrowers, according to industry executives who have seen it. It would exclude those who are delinquent on their payments — about 22 percent of all subprime borrowers, according to First American LoanPerformance, an industry research firm.

The plan is also expected to exclude any borrower whose introductory rate expires before Jan. 1. About $57 billion in subprime loans are scheduled to be reset at higher rates in the final three months of this year, according to estimates by First American LoanPerformance.
What happens when the Fed finally concedes it can't continue cutting rates at this pace? Then what are we left with? As a technical trader I try not to focus on those things but rather focus on what's in front of me. What buyers and sellers are telling me.

Today's move certainly sets us up for further strength into the open tomorrow but lets remember that the indices have just a bit of breathing room left before hitting very strong resistance levels and buy volume continues to subside. With a glance at the action in leading stocks recently, I continue to see more volume on the sell side than on the buy side AND Pharma and Bonds are showing up as leading sectors right now. Not exactly the stuff bull markets are made of is it? If you've recovered much of your losses from the Oct/Nov sell off, you might want to consider locking in some of those gains soon.

Resistance in the Indices:
Nasdaq: 2725
S&P500: 1490 - 1500
Dow: 13500 - 13600
Russell 2000: 800