Tuesday, August 22, 2006
Low volume, as predicted, has arrived. Yesterday was predictably a negative day, but selling never really took hold after an initial drop. We may see more backing and filling today and then could potentially see the market move back up near last week's highs later in the week. There are a number of reasons to distrust strength at this point. First of which is the fact that the bulls never experienced a capitulation event during the last downturn. Moreover, the market has rallied on below average volume. Most significant, however, is the fact that new highs have been sorely lacking. Stocks that rallied last week were weak stocks that rallied on short covering as shorts were squeezed. Significantly, stocks with strong charts trading near 52-week highs, failed to participate in the latest rally. Why is this important information? It means that smart money was willing to buy strength in expectation of the market making a strong bull run. The rally was then dominated only by short covering, which is indicative of a bear market rally, not the beginning of a new leg higher.