Follow Through or Not?

Just as in your golf swing, follow-through is very important in the stock market. What I am talking about is a confirmation day where the market averages move sharply higher on higher volume. Which is sort-of what we saw Wednesday, but only because volume has been unusually low, which is a worrisome sign in and of itself. If the market is going to rally and rally sharply, in order for me to be convinced that it is the start of a new uptrend, it should do it with strong volume. The Nasdaq could not even trade more than 2 billion shares, even though volume was higher than yesterday's. So far, this rally has the earmarks of a three step bounce. It appears we may be in the third and final step. But the market has a few more days to confirm, so it pays to not be too hasty and stay on the sidelines with dry powder, in case it is possible to deploy it. Resistance on the NDX is 1600-1610. This may be the last selling opportunity of the summer.

Meanwhile, watch the bond market for important clues, here. If the economy is going to hold together, bond yields should stay firm, if not rise. But we may be witnessing the creation of a short to intermediate term top here. With the Fed set to raise rates again next week, a stock rally and a bond market selloff into early next week would fit the scenario of a setup for a new test of recent support at 1510-1515. Below that the support levels are 1480 and 1395, which I would expect to be breached on the way to 1300. But best not to be premature and see how story plays out and be ready to lighten up on positions, especially if volume is still lacking by next Tuesday.