MODEST RALLY ATTEMPT CONTINUES BUT ON LOW VOLUME -- MARKET MAY SIMPLY BE ENTERING A SIDEWAYS TRADING RANGE FOR BALANCE OF YEAR

VOLUME REMAINS LIGHT ... In a legitimate upturn, one of the first things we look for is rising prices and rising volume. We've seen a modest price upturn over the past week, but very little volume to go along with it. Today's price bounce came on lower volume as well. That doesn't mean the market can't rally further. It probably means that we shouldn't expect the rally to carry very far. The three charts below show short-term improvement in the 14-day RSI line which is moving up to challenge the 50 level in the Dow Diamonds (Chart 1), S&P 500 SPDRS (Chart 2), and Power Shares QQQ Trust (Chart 3). Chart 1 also shows the daily MACD lines turning positive for the first time in nearly two months. [The weekly and monthly MACD lines, however, are still solidly bearish]. On Tuesday, I wrote that converging Bollinger bands suggested a short-term rally attempt. Today, I'm using the bands to determine potential upside targets. All three major market ETFs closed above their 20-day averages today (although not by much). That increases the odds that they might still reach their upper bands. That would be a logical upside target which would be well within the bounds of a bear market bounce.

Chart 1

Chart 2

Chart 3

OR WE COULD BE HEADING INTO A TRADING RANGE... Another possibility is that the market is simply entering a trading range to work off its major oversold condition. That interpretation is supported by Chart 4 which shows the directional movement system. The red and green lines represent selling and buying power respectively based over the last fourteen trading days. When the red line is above the green line, as it has been since early September, the trend is bearish. The black line is the Average Directional Index (ADX) line which is essentially the difference between the two lines. A turning point in the short-term trend takes place when the black line rises above the other two lines and then starts to drop -- as it is now doing. The last time that happened was in July which led to a modest six week bounce prior to the recent downturn. A downturn in the ADX line doesn't necessarily signal a trend reversal to the upside. Just as often it simply signals that a market has dropped too far and needs to spend some time consolidating (or simply trending sideways). Light volume is also characteristic of a period of sideways market action. With seasonal trends turning a bit more favorable after October, a sideways market for the rest of the year may be the best we can hope for.

Chart 4