With traders filing in from Labor Day vacations and trading volume returning to normal levels, the market was to reveal more clues as to its direction.  There certainly has been much speculation (myself included to a certain degree) that the rally off the July lows is/was a sucker’s rally in danger of a collapse once traders returned from summer vacations.  In the first couple days of trading last week, it appeared that scenario would play out after 2 straight days of mild distribution..  However, the steep drop in commodity prices recently (which have stoked inflation fears over the past year) appears to be igniting this market as a massive shift from anything commodity related flows into technology (primarily), consumer descretionary, healthchare, financials and even retail names.  It’s too soon to tell just where the floor of the commodity drop is and whether it can be the catalyst for a sustained market rally, but one thing is fairly certain –   it’s going to be quite some time before we see sustained and substantial moves in these commodities again (see this chart that shows crude taking out its 3 year trend line).   There is just simply too much money pouring out of them right now.  In the long run, this bodes well for the market.

Today’s action was the strongest I’ve seen in a month as prices moved up substantially with volume well above average levels.  SelfInvestors.com Leading Stocks (an indexed handpicked by me comprised of the fastest growing companies near a breakout or having already broken out of a base) also did very well today (yesterday they did not).  One day obviously doesn’t make a trend, but it may be enough momentum to at least get to major resistance areas in the indices that I’ve mentioned in previous reports – the multi year high in the Dow at 11670, the multi year high in the S&P at 1327 and the 200 day moving average in the Nasdaq at 2234.  Despite today’s bullish move and the "economically positive" drop in commodities recently, I’m still very much concerned with these major resistance levels.  I’ll point out again that the rise over the past few months is a steep one with the indices (particularly the S&P and Dow) etching V like bases which are prone to failure.  If and when we test these multi year highs, I would be listening to that little voice of reason over your shoulder saying, "Be careful up here, be careful".

Note: on Friday the all important CPI number will be released.

Here’s a look at the charts and their resistance levels.

Two days ago the Nasdaq broke out of its downward trend as money begin to flow into technology names once again.  Yesterday, the S&P followed the Nasdaq lead and joined the ranks of breakout indices as traders once again cheered inflation data.. at least temporarily.  It’s important to remember that inflation is still out of the range of the Fed confort level with a year over year increase of 2.75% so some tightening may still be needed.  Outside of that, the tone of the health of the market has certainly changed in the last 2 days to a more bullish tone. 

While I began to shift more from the short side to the long side on Tuesday and will now buy on weakness rather than sell and/short into strength,  I’m not willing to call this a raging bull just yet.. not even close.  This market is going to have to prove itself at least once or twice more.  The market has posted 2 straight days of higher volume than the day before, which technically indicates institutions are beginning to put some money to work, but clearly they aren’t jumping in with both feet just yet.  There is some caution there.  Let’s not forget that short covering no doubt played a role in the recent rally.

The S&P broke above the 1290 level I discussed yesterday morning and held there, preserving the breakout move.  However, volume was just OK for a breakout move like this.  I’d like to see more of a convincing spike to accompany it.

The Nasdaq showed greater strength than both the Dow and S&P as money began to flow into technology names, particularly the semis.  With the break above the downward trend line, we now turn our attention to new support which is provided by the 50 day moving average around 2100.

The Dow has some work to do before I’m willing to call it a breakout.   I want to see it convincingly take out the August highs with big volume.  Volume actually came in below average yesterday.  Not what you want to see with a big price move. 

So the bottom line is that the market has shifted to a more bullish tone in the past 2 days, but volume remains a bit tepid.  While the recent breaks above resistance in the both the Dow and Nasdaq indicate that long positions become more favorable, I wouldn’t be chasing positions up here.  The market has come a bit too far too fast and we need some healthy consolidation from here.  I’d like to see the gains of the past couple days wiped away with decreasing volume.. that would provide further evidence of a strengthening bull and a great opportunity to put more money to work on the long side.

Following a surprising cooling in inflation, at least temporarily (let’s remember that one month of data doesn’t make a trend), the market got a nice pop yesterday.  While volume came in higher than the day before, indicating accumulation, it was not all that impressive considering the price move.  I want to see another day of higher volume than the day before (and this time above the 50 day average) to indicate more institutions putting money to work.  The Nasdaq cleared two key resistance levels yesterday (the downward trend line and the 50 day moving average).. no doubt this is a very important move.  Now let’s see if this old resistance level can hold as new support.  Both the S&P and Dow remain in striking distance of a breakout move.  The market is getting another pop this morning as traders like the CPI data indicating a pause in the escalating inflation.  I certainly won’t be chasing this move at the open.  Let’s see if it can hold in the first hour, then we might have a chance at a real breakout today. 

The level on the S&P I’m watching today is 1290.  If the S&P can move above this level with volume higher than the day before and hold there, that would be a very bullish move and force me to move more cash into the long side.

What I’m looking for in the Dow today is a strong move and hold above 10344 with volume higher than yesterday above the 50 day average.

I mentioned several weeks ago to members of Selfinvestors.com that another major upgrade is in the works.. I won’t give a timeline because these projects always seem to take much longer than expected.  BUT, I will say that one new feature will be a Market Snapshot page where you’ll be able to quickly see just how well the overall market is doing.  Along with this new feature will be a MidDay Update on days when the market moves significantly in any one direction.  I’ll discuss the strength of the move as well support and resistance areas.  This new feature will be available to registered users of SelfInvestors.com completely free.

** MARKET SNAPSHOT **

Looking at the price change is of course one piece of the supply/demand puzzle that all financial sites use.  What you won’t see at nearly every financial site is a focus on the volume behind each move.  That’s where the SelfInvestors Market Snapshot page comes into play.  Throughout the day (updated every 15 min.), you’ll be able to not only see price changes in the major indices (Nasdaq and Dow) and ETF tracking indices (SPY, QQQQ, DIA & IY), but you’ll be able to guage the volume as compared to its average at 15 minute intervals throughout the trading day.  For example, at 1:15PM EST the Nasdaq is up 1.7%, but volume is tracking 11% below the average at this point in the trading day. 

We’re at the halfway point of the trading day today and looking at the numbers makes it clear that today’s rally doesn’t have the big fellas behind it.  Considering yesterday’s volume was very light as well, we could still get a day of accumulation (if today’s volume can surpass yesterday’s), but we’re going to need to see some volume into the close on the upside. 

The rest of today’s data is as follows:

Nasdaq ETF (QQQQ): up 1.85%, volume currently tracking 6% higher than average
Dow: up .84%, volume -25% from average
Dow ETF (DIA): up .84%, volume -42% from average
S&P500 ETF (SPY) up 1.00%, volume -16% from average
Russell Small Cap ETF (IYM): up 1.57%, volume -23% from average

** Self Investors Leading Stocks Index **

Another component of the Market Snapshot page is the data for the SelfInvestors Leading Stocks Index, which you can currently find just to the right of this post.  SelfInvestors Leading Stocks are stocks that are currently in the Breakout Tracker database.  Most of these stocks are near a breakout or have already broken out.  This database is comprised of market leaders so provides a great look at the health of the market.  Again, looking at today’s data indicates that the rally today is muted.. no reason to get too excited about today’s move.

While advancers are crushing decliners 313 to 34 and advancing stocks are up 1.96%, volume is currently 16% below average at this point in the trading day for these advancing stocks.  Institutions are not putting money to work in leading stocks today.

** Where’s the Money Flowing **

Many websites just provide leading industries based on price performance alone.  Without the volume, this can be misleading.  The only way that I know of to guage industry/sector strength WITH volume levels is through the analysis of ETF’s.  A couple years ago this was not possible, but as more traders/investors use ETF’s they become a much better tool for guaging the health of the market and seeing where the money is flowing (or not flowing).  Using the proprietary SelfInvestors Demand Indicator score which measures price and volume movements, I’m able to quickly see which sectors/industries are seeing the greatest inflows of cash.  For example, the Market Snapshot page is currently showing that demand is currently greatest in Pharmaceuticals, Financials, Gold, Health Care and Telecom while demand is weakest in Consumer Services, Aerospace/Defense, Internet, Transports and Oil & Gas Services.

** Stocks **

The final component of the Market Snapshot page is a section that displays Breakout Tracker stocks moving up and down with significant volume.  This area is still in the planning stages.

** Several Other Features Planned **

Other components of the Market Snapshot page will include article headlines, SelfInvestors portfolio allocation, quick links to SelfInvestors State of the Market reports, Accumulation/Distribution calender, etc.   

If you’d like to begin receiving the MidDay Updates as well as the Weekend Review Reports, feel free to sign up for the free membership on the home page of SelfInvestors.com