On Monday, the Dow Jones Industrial Average hit a new two-year high as investors shifted their focus to blue chips. But even though the stocks of the Dow were in favor, volume was light at just 960 million shares trading on the NYSE and 479 million on the Nasdaq. That’s unusually low volume for a blue-chip rally and raises a question as to the level of institutional commitment to this sector. (For one blue chip to buy, see the Trade of the Day.)

Lighter volume on advances and heavier volume on declines indicate that a shift is occurring and that the chances are high that sellers are taking over and that a decline is pending. And there are other subtle technical analysis indicators that give hints as to pending weakness.

While the blue chips were being bought last week, the small caps were heading south. One measure of how small-cap stocks behave is the movement of the Russell 2000 Index. The Russell violated its 20-day moving average on Wednesday, and traded lower both Thursday and Friday. Yesterday, it rose 0.79% after almost touching its 50-day moving average, but its volume was very low, and so additional selling is to be expected.

And an important measure of a market’s maturity is the number of weekly buying climaxes that occur. A buying climax happens when a stock or index makes a new yearly high during the week but closes down for the week. Dorsey Wright follows this closely and said that even though 600 NYSE stocks made new highs, over half of those closed lower for the week, which is a very high number. And the S&P 500 even had a buying climax along with two other major indices: the Dow Jones Transportation Index and the S&P MidCap 400 Index.

Finally, one more sector should be watched that could trigger either buying or selling: the Consumer Discretionary SPDR (NYSE: XLY). This ETF measures the performance of the important sector that includes automobile and components, consumer durables, apparel, hotels, restaurants, leisure, media and retail. So far, the XLY has been supported by its 20-day moving average, but compressed within a very narrow zone of trading. The tight trading zone indicates that a break in either direction could be sharp, and a break on volume above $38 could take the overall stock market higher, but a break under $37.70 (20-day moving average) could spell trouble.

We remain cautious bulls for the long term and intermediate term. Traders should take it day by day with a bias toward playing the short side on rallies.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.