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.