Underlying Strength is Revealed if You Know Where to Look

The broader market continued to pull slightly lower yesterday and volume levels remain high on all major indices. Most people have the idea that high volume at the upper end of the trend represents distribution and that it is a bad sign that the market is ready to make a turn for the worse. In many cases this is true, but it's not always that simple. There are a couple of reasons why we believe the high volume levels over the past three days represent accumulation and not distribution. First, advanced decline ratios have remained positive as more stocks continue to advance than decline. The second reason is more subjective and much harder to quantify. We scan thousands of stocks each day and individually look through several hundred charts that result. On Tuesday you might recall we noted that we didn't find much to act on but that there was little sign that bears were getting a foothold either. Yesterday scans were slightly more positive as small caps and stocks from a few leading sectors started to once again show strength. Today's scans reveal that that positive trend is once again gaining traction as more and more breakouts are following through and more and more stocks are once again moving higher on heavy volume. In fact, twice as many stocks showed up in our volume scan today compared to yesterday. Of those stocks roughly 90% were making moves higher. This is not what market tops look like. Instead, this is what occurs right before a new leg higher gets underway.