The chart below of the S&P 500 index depicts the consolidation pattern of what many refer to as a double bottom (green lines). The break higher occurs when the price eclipses the apex between the two respective bottoms. This is an indication of positive sentiment from investors for a change or switch in direction. If the break higher on Tuesday is positive for the broad markets and investors, then where are all the positive emotions and outlook that accompanies a trend change?

There is one thing missing from the move – volume. The volume bars at the bottom of the chart show below average volume since the second bottom reversal last week. In other words the advance is questionable because of the lower volume. One could conclude, the move higher on the second leg came from a lack of sellers more than positive momentum from buyers. I am not saying we cannot have a broad based rally in stocks without ample buyers. We accomplished a rally in the second half of 2009 on low volume. What I am saying is to remain cautious and not bet the farm on this bounce off the recent lows. I would take the lack of volume as an indication investors appetite for risk has receded along with the markets off the April high.

Economic data is pointing to less spending by the consumer. The drop in spending validated by the economic data is creating a calmer market sentiment or smaller expectations for growth on the horizon. In return investors have less desire for risk in their investment portfolio. The flight to safety (risk avoidance) over the last six to eight weeks is showing up in the price of gold, Treasury bonds and a stronger dollar. Take note and adjust the risk of your portfolio accordingly.

The volatility index spiked well above the 40 level as the anxiety rose relative to the concerns in Europe. The volume during the selling process over the last eight weeks was well above average indicating investors have been active in paring down the risk allocation in their respective portfolios. Volatility has subdued with the recent buying, but it is still in the high 20’s and represents elevated concerns or fear from the investor.

The move higher has failed to produce any substantial leadership. Tuesday’s breakout move came on the back of a few sectors pushing higher. Semiconductors were up more than 5%, but the sector also led the downside during the sell off. We need strong leadership for the trend reversal to be a sustainable move.

Reviewing the chart above you could have put money to work on the break above the 1105 level on Tuesday. Because of the potential risk, a stop at 1085 would be appropriate along with a target of 1150 initially. The risk would be 20 points in exchange for 45 points or slightly more than a 2 to 1 risk/reward ratio. Not the best in the world, but realistic in this environment. If the volume doesn’t matter and the momentum picks up to push the index to the 1182 level, the reward gets better. However, we are going against the statistical odds.

From my view the volume is telling us something about this move higher. Proceed with caution, use stops to protect your downside risk and avoid a potential money trap. The question to ask is, without volume will the move higher be sustainable?