Low Volume in QQQ Suggests Rally Will Falter

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The chart above is the volume of QQQ with some moving averages and standard deviation bands.  The 8 day average of the volume is the lowest since August 2013, at which point it went very slightly lower.  The next lowest reading in between came at the beginning of Sept 2014 as stocks pushed towards the highs and then corrected sharply into October 2014.

In general waning volume on a rally is a bearish leading indicator meaning that it will occur in advance of a top in price.  So my interpretation here is that near multi year lows in volume as the other indexes are trying to make breakouts of the December highs (and in the NYSE highs back in July 2014), is probably not a good sign for bulls.

I have analyzed current Commitment of Traders data for the major stock indexes, and a major selling surge came in in mid December.  There is not the same level of extreme in selling currently.  That could be interpreted as a bearish divergence, but it also could be interpreted as the smart money just not being extreme, and so there may be room to move higher before they create another extreme selling effort.

Shorter term measures of the total put/call volume ratio and equity put/call volume ratio came towards the lower end of their recent range this past week.  And so in conjunction with market volume waning, it appears that some complacency is setting in for this rally.

Given stocks are at new all time highs, a trailing stop behind the market may be the way to proceed from here, but another possibility is to exit part of long positions at these levels, with the idea to consider rebuying on the next correction.

Pete