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Volume, Volume, Where Are You?

NEW YORK (TheStreet) -- The market selloff that I have been looking for finally made itself present on Tuesday. After the futures were up early on Tuesday morning, the stock market opened to the downside and continued to trade lower during the day.

The DJIA closed down 129.53 points to 16401. The S&P 500 closed down 16.94 at 1867.72. The big loser on Tuesday was the Nasdaq, down 57.30 points at 4080.75. The Russell 2000 closed down 18.29 points at 1108.

The volume today was pathetic. This has been a very concerning and important issue for me. I will call your attention to an extremely important fact. The volume on Monday was down 26% vs. the one-month average, and down 40% vs. the 3 month average. Tuesday's volume was no better. The volume was less than Monday's volume in the S&P 500 Trust Series ETF (SPY).

What is going on? Where is all the volume? I presented a live screen show in my chat room Tuesday that showed the weekly price action vs. the internal volume trend of the four major indexes. What was quite noticeable was the difference between the Nasdaq and Russell 2000 index vs. the DJIA and the S&P 500. The Nasdaq and Russell 2000 have been in a Trend Bearish environment since the week ending Feb. 14. That has been supported by the volume trend.

The DJIA and the S&P 500 have been in a Trend Bullish environment that has not been supported by the volume trend. That is a negative, bearish divergence from a trend standpoint, a three-month or longer time frame.

If the building keeps rising, in this case, the prices of the DJIA and S&P 500 index, without the proper increase in bullish volume trend, the foundation keeps getting weaker and weaker. It eventually will fall under its own weight.

That is what is happening with the DJIA and S&P index. I have spoken at length about a two-tiered market. The Nasdaq and Russell 2000 have been acting the way they should be. The DJIA and S&P are the two indexes that are out of sync. Those indexes will eventually succumb to the lack of volume and become Trend Bearish.

The big losers on Tuesday were the momentum stocks of Monday. Apple (AAPL), Facebook (FB), and Netflix (NFLX) all gave back recent gains. FB and NFLX are Trend Bearish stocks with AAPL in a Trend Bullish condition. Buying Trend Bearish stocks at their highs is a trader who has no proper risk management process.

As a trader or investor, if volume patterns are not part of your risk management process there is a design flaw that will not allow for proper risk management. A macro trend understanding of the market is critical in determining if the indexes needed to be traded from a bullish or bearish perspective.

Ffor those who do not think that we have an inflation problem in this country, take a look at these numbers. Wheat is up 18% for the yearto date, corn up 16% and coffee up 77%. Coupled with the American dollar that is burning, you have consumer accelerating inflation. That is never a good thing and it slows growth in this economy.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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Chart of I:DJI
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