Although yesterday's broad market price action was strong, it was not confirmed by volume, as total volume on the NYSE and Nasdaq fell short of Friday's pace. NYSE volume was quite disappointing considering that the S&P 500 and Dow broke out to new highs from a six week long base.



The Nasdaq Composite failed to produce a follow through day due to the light volume advance, which also prevented our stock market timing model from shifting into buy mode. The fact that the Nasdaq Composite is still trading below the declining 50-day MA is also a negative.



The light volume on the NYSE prevented the S&P 500 from triggering a buy signal as well. However, since the S&P 500 is at new highs, we are shifting the model into neutral as we wait for volume to confirm the current advance.

In terms of how we operate, there isn't much of a difference with the model in sell mode or neutral when the market is attempting to rally. With either signal we still have the ability to build long exposure, we just can't go overboard (say 30-50% long is the limit). Once there is a buy signal in place then we can ramp up to 100% long exposure or more (if conditions are strong).

With volume failing to confirm Monday's advance, we will remain in S.O.H mode for now, but we do have one new buy setup on today's watchlist in Guggenheim S&P Global Water Index ($CGW). In case you missed it, click here to read yesterday's explanation of how "SOH mode" is used to handle choppy markets.

$CGW broke out to new all-time highs in 2014, clearing the prior highs of 2007 on the monthly chart below.



With $CGW sitting just off all-time highs, the price action formed a tight consolidation above the rising 50-day MA. On Monday, $CGW cleared the downtrend line of the consolidation on a pick up in volume. If $CGW can follow through on Monday's move and break the highs of the current base, then it will have no resistance in its way, just clear skies above.

 

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.