Volume Analysis January 2022

Contemplating a new year ahead, you may be wondering…what is going to happen? An old story serves as an analogy: Years ago, some men were on a leaky old ship in the middle of a rough and stormy sea. One of them asked the captain, "Are we safe?" The captain replied, "Well, the boilers are weak and may explode at any moment. The ship is taking on water. To be very honest with you, we may go up, or we may go down, but at any rate, we are going on." And "going on" is the way we face this new year.

We made it through 2021 without taking on water. But are we safe? This question is difficult to answer as we begin 2022 on a foggy day. At the beginning of this new year, we still face significant challenges, but there are also strong reasons for hope. Yes, there are challenges to overcome, such as a pandemic, geopolitical threats and inflation. But there are also potential opportunities within the economy and the equity markets. Let us probe through the mist together and explore what may be on the other side of the horizon by analyzing the charts.

Source: OPTUMA www.optuma.com/volumeanalysis

Let's begin with the top panel showing the S&P 500. You need not be a market technician to discern that this index is in a clear uptrend. After consolidating in December, the S&P 500 hit new all-time highs last week, starting the new year off in bullish fashion. Notice the chart below the S&P is Capital Weighted Dollar Volume. It shows us how much money is flowing in and out of the S&P 500. Notice it is in an uptrend as well, confirming the S&P 500. Yet unlike the S&P 500, CW Volume is not at all-time highs, and its rate of ascent has significantly trailed the price index since March of last year. Overall, the trend is your friend…and the intermediate trend of the price index is very friendly right now.

Source: StockFinder, Worden Brothers

Moving on to the next chart, we have the S&P 500 again on the top panel. The blackline below the S&P price bar is the long-term trend going back well over a decade. In April of 2021, the S&P broke above this long-standing resistance represented by the blackline. Since then, we have tested this former resistance line, which is now acting as support. That support line is presently 4410, corresponding to its moving average support at 4315. A weekly closing violation of these levels would cause significant damage to my long-term technical outlook.

Why would I mention this? Let’s move on to the next panel below the S&P 500 price chart showing the % of stocks making new highs in green. Notice this leading indicator peaked in February of last year and has been trending down ever since. We can therefore garner that although the S&P 500 is near all-time highs, a high percentage of stocks may have resistance ahead.