January has proven a strong month for stocks climbing on lower than average volume. I would like to answer a lot of questions this rally poses as if we are in a camp high on a cliff observing the battle of bulls and bears...

How can the market rise with so much negative news?

The market is comprised of bulls and bears. The bears gain ground on new negative news. The bulls climb a wall of worry in the face of negative news with the idea things cannot get any worse. This attitude considers all negative events are completely factored into the markets. Only a substantial negative event now seems capable of pulling down equities although a "pull back" is over due.

Why is a pull back expected if all negative news is factored into the market? Why shouldn't the market just keep rising?

Good point. Since fear and greed are primary psychological drivers of the market, pull backs typically occur as greed causes large traders to lock in profit gains. Importantly we study the underlying longer-term momentum in order to judge the market will keep moving higher after the pull back. Technicians call a pull back "healthy" because it suggests a market ebb and flow rhythm instead of parabolic move and sudden crash.

Oscillators point to an "over-sold" market. Is that why a pull back is expected?

Oscillators are great indicators as long as we remember they are "indications of likely activity, but not absolutes." Oscillators are suggestive of price action. Unfortunately in all rallies or bull markets the oscillators tend to stay in over bought territory making folks reluctant to enter a trade. Conversely, oscillators typically stay over sold as a bear market gets worse and "experts" call for a market bottom. Think about that.

At the end of the day people are likely to use an oscillator that "speaks" to them. For this newsletter the weekly momentum indicator works very well at keeping us in the trend for the long term. The problem is trend change from sideway channel to trend channel. The very reason our weekly indicator serves us so well is the exact reason we typically miss initial change of direction. We accept this. That's not to say we will not take new direction trades, in as much as to hold back on major positions in the new trend.

Does volume matter any more in the market? It looks like concern over volume missed the January move in equities.

The question/observation is good. Technical analysis typically uses volume as a supportive crutch or supportive evidence institutional money is coming into the market. Remember the more money entering the market the more likely the tide is rising and a rising tide lifts most all boats.

The climb in equity prices starting in March 2009 was accomplished on lighter volume. The market rallied 70% on light volume. The difference in March 2009 and January 2012 is that in 2012 we have the world's second reserve currency imploding from structural defects and wide spread sovereign nation historic debt levels. This is exactly why the US dollar was climbing and why markets in 2011 opened and closed near the same level for the year. Global money sought shelter and the US dollar was gaining on a failing Euro.

What caused the US dollar to fall and why is this a big concern?

The US dollar fell based on two central bank actions...the Bank of China injected liquidity into the Chinese economy first. Traders immediately assumed this meant China was avoiding a recession and that China would start importing raw materials along with increased finished goods exports from Europe. Most all multinationals firms with a presence in China saw price appreciation in their stock.

The second action dropping the US dollar was the US Federal Reserve last week announcing an extension of 0 to .25 federal funds rate for their best borrowers through 2014. This action is an implicit axe to a climbing US dollar and intentional in my opinion. The FED knows a climbing US dollar means the world is reluctant to believe in the Euro zone recovery, knows climbing US dollar tends to cause commodity prices to fall, and finally the FED knows that a falling US dollar is inflationary. The FED seeks to avoid deflation at all costs.

With the Chinese Yuan linked to the US dollar any time the FED knocks down the attractiveness of the US dollar, the FED helps keep the Chinese export economy supported. So you have both Chinese increased liquidity and a falling dollar helping the Chinese economy serve as the engine of global growth. This is the overall perception at this moment in time. As I wrote last Thursday morning we should expect virtually all financial instruments will benefit from the FED piercing the US dollar.

Why is the FED continuing the purchase of longer dated bonds and Federal insured mortgaged debt?

A lot of people are calling for a top in bonds. We have maintained that the best trade here is LEAP options on TBT...taking small nibbles only. The idea is never to fight the US Federal Reserve. They have the largest check book in the world. The reason they are buying US bonds is because without their presence the USA stands a chance of a run on the bank with speculators dumping bonds. The day the FED stops "Operation Twist" is the day of reckoning for US bonds. Until this event occurs, we should honor the price charts and only consider shorting bonds en mass when support is taken out.

As for the FED buying mortgage agency debt to assist the US housing market; FED actions have served to post pone the housing recovery. There is no sense of urgency on the part of home buyers to lock in low rates.

At some point the FED will come to the realization their game plan ... their paradigm must change. When the PhD's at the FED think creatively offering a unique solution then we can consider the FED evolved and look for meaningful change in the economy. For now, the FED wants to apply liquidity attempting to reflate the US and global economy. The most disturbing news in my opinion is the idea the FOMC is leaning toward QE3. The FED is upping the pressure on all US senior citizens and anyone living on a fixed income with conservative investments. This includes pension funds seeking conservative yet reliable growth. The FED wants a booming stock market. This has been documented from Bernanke comments.

What is your outlook now?

I can't help but think a pull back is in order yet bears have no conviction here. Last Friday was a good opportunity for a pull back start. US GDP for fourth quarter released Friday signals slower growth, but bears stayed hibernating. It is as if bears are waiting for the Euro zone developing another fissure or week's US Employment Situation report if surprisingly negative. We are in a "hold your nose and go long" market. Individual stocks are quite risky due to the lighter trading volume. What I mean is they can turn down at a moment's notice. The rally is not yet broad based lifting all boats.

US earnings results are pretty good. That's a positive right?

Of the 200 companies that have reported, 59% have beat earnings expectations. I take a lot of this with a grain of salt considering the source of estimates biased.

What else do I need to know?

At the end of the day as long as the US employment rate continues moving down and consumers are spending the US economy can improve. Global traders have embraced risk in January as evidenced by the rising Euro. Keep your eye on the Euro.

The chart review this week will highlight a benchmark associated with renewed bullishness. Remember the pull back may or may not occur. Friday's daily chart action might be the start of the pull back. It was incredible to see the 4PM ES (S&P 500) futures price bar surge as bulls worked to keep chart technical's supportive of their position.

To learn more from Martin, visit HitTheMarkTrading.com to join his mailing list and receive blog updates.