Bull Flag into QE3

Thursday was an exciting day in the markets with the fed announcing a third round of quantitative easing. I would like to take a technical look at this last weeks market actions.

S&P 500:

Formation: On September 6th, 2012 you can see a big impulsive move up in the market, the flag pole. The next couple of candles were smaller and were going sideways slightly downwards, the flag. Moreover, this was confirmed by analyzing the volume where it dried up during the flag portion, a text book setup.

Breakout: At this point I was waiting for confirmation which came Thursday with a big move up accompanied with high volume. This of course was the day of the FOMC meeting with the fed announcing a third round of quantitative easing (I should mention I did not expect a third round of easing before the election, but was looking for a big push up regardless).

Final Thoughts:  I expect the market in the short and intermediate term to continue to rally. After every significant fed action since 08 (QE1, QE2, Operation Twist) the market has experienced a strong rally. It should be mentioned though that each one is progressively weaker than the previous, so be cautious in the long term perspective. Moreover, the risk of inflation has dramatically increased again. Gold/silver has been rallying and the US dollar has weakened against many other currencies. Remember a big part of these QE's are to strengthen the United State's trade balances. Finally, the Russell 2000 and Nasdaq seem to be finally catching up the S&P 500, a good sign of a healthy rally, and experienced similar patterns as shown below.

Nasdaq:

Russell 2000:

The Low Volume

By this time it's not secret that the stock market is trading at abnormally low volumes.

S&P 500 All Time Monthly Chart

As you can see since the last financial crisis volume has been decreasing while the market has been rallying. Moreover, current volume about the same as it was in the late 90's. I see three reasons for the following:

1. Investors are still fearful of the stock market since the last financial crisis along with the current euro crisis.
2. Baby boomers are retiring shifting their money from stocks to fixed income and safer assets. 
3. Long term investors are frustrated with how the stock market has not gone anywhere in the last 12 years.

As you can see though from the lines I drew, since 09 the market has been rallying while volume has been decreasing. I would point to the federal reserves actions to explain this (QE1, QE2, Operation Twist). I personally think that this makes this current uptrend very fragile, and a red flag with the low volume.