Continued Anemic Trading Volume a Sign of Negative Things to Come?

Market continues its lackadaisical maneuvering and shows that traders are unwilling to exemplify any conviction whether bull or bear. I don't know that I have ever seen such a dead market following a volatility laden correction and unwavering global unrest (unrest as in the Japan situation and MENA instability).

Typically, seeing an unwillingness of sellers to step in after retracing into prior support like we have seen in the past week, would lean me toward a bullish frame of mind. This type of consolidation is often a sign that a breakout is imminent. But it works both ways and buyers are also failing to bring the market higher. I mentioned a key resistance level in the post from March 30th. The ES has failed to confirm above that level for the fourth consecutive day on low volume.

Looking back, the last time volume was this low during a non-holiday period was just before the market crash in September of 2008. Not a great thought if you are long the market. I did say in the previous post that I like buying the dips, and I will still considering doing so, but only after support has confirmed so that I can put a tight stop on any long positions. I would not defend any long positions right now.

You really have to entertain both long and short positions and look for the best entries so that you can use tight stops. Market could break in either direction. However, there are new warning signs that a sell-off could be on the horizon:

• Crude Oil (CLK11) settled at a 30 month high today (Monday) at $108.24
  
  
• Bernanke has acknowledged that commodity prices may create a transitory or temporary rise in inflation. He also said the following:
  
  “We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability.”
  
  The fact that Bernanke is acknowledging that he could be "wrong", shines some negative light waves for the trading community to digest.
  
  
• TEPCO has authorized the dumping of more than 2.6 million gallons of radioactive water into the ocean. Listen to the explanation that a TEPCO spokesman gives:
  
  "Filtering radiation from the water would take too long and its release will help protect equipment in the buildings housing the reactors," said Junichi Matsumoto.
  
  Is this action in the best interests of preventing further danger or is this in the best interests in saving money by preventing further damage of TEPCO equipment??
  
  I don't know whether the radiation levels that are being added to the sea pose significant long term threats to the ecosystem or not (some "experts" say no), but the fact is that the containment of the situation at the Fukushima Dai-Ichi nuclear station continues to be a problem and the lack of positive news coming out of Japan is certainly not a good sign.
  

The reason I bring up these signs of negativity is just to present the case that we could see another dip down before officially returning to the bullish ways. In fact, I fully expect a bit of a shake-out via choppy action before the markets go on to make new highs. I do maintain my belief that we will see new highs this year, I just don't think the timing is now to jump on the long bandwagon...

Considering the Week Ahead. Optimism Wins.

The unemployment data from last Friday can only be looked at as positive as the US added 216,000 jobs and the unemployment rate dropped to its lowest level in 2 years falling to 8.8%. Of course if you look deeper, you will see that this number is not entirely accurate; government statistics do not count folks who are no longer looking for work. To get a better idea of what that number represents, there have been over 8 million jobs lost since the recession began and those jobs have yet to be replenished.

Regardless of the underlying data, the reported employment situation is positive and that is what is most important in the short-term.

Current Price-Point of US Equities
We have reached critical retracement levels since the market reversed over two weeks ago and no selling has returned. Amidst a world of uncertainty as well as a return to rising oil prices, sellers have yet to step up to the table. Considering this information, I have to favor an outlook of further upside before anticipating that another sell-off is likely. Barring any new cataclysmic news, I will be looking to buy any dips into support.

The Dollar
It will be interesting to watch the US dollar going forward. So many people express fearful views that the US dollar will continue to depress further. And, hey, deservedly so. However, its all about timing with the decline of the dollar and its not going to happen overnight. Perhaps it will one day be worthless, sure, but right now, I see a likely rebound coming, at least in the short-term. Technically, it is oversold and fundamentally we are seeing positive economic data flow out of the US. That combination can only suggest a rebound in the dollar is likely. The ISM Non-Mfg Index will be reported this Tuesday at 10:00AM EST. A positive announcement should only help the dollar. Also to watch, FOMC Minutes Tuesday at 2:00pm EST and Jobless Claims on Thursday at 8:30am EST.

The dollar and the stock market don't exactly share a perfect inverse relationship, but looking back to the summer of 2010, you can see that the dollar has been consistently declining while the stock market has been on the rise. In that regard, it will be interesting to see if the equities markets turn down in reaction to a rise in the dollar, if that rise does happen.