The increasingly contentious tone regarding the debate over the fiscal cliff along with new tensions in the Middle East battered an already weak stock market on Wednesday. MoneyShow’s Tom Aspray takes a look at key market levels investors should watch.
The stock market’s attempt to stabilize failed Wednesday afternoon as investors apparently felt that after President Obama’s press conference it will be more difficult to avoid the fiscal cliff.
The news that the Hamas military leader was killed in an air strike also likely pressured stocks in the last two hours of trading. The threat of a broadening conflict will continue to worry the market and add to pressures to the fiscal cliff.
In addition, we have a host of economic reports Thursday, as in addition to the jobless claims we get the Consumer Price Index, Empire State Manufacturing Survey, and the Philadelphia Fed Survey. It is unlikely that any of the reports will have enough of an impact to turn the market around, but if they are better than expected they could stem the selling.
The more important question for investors and traders is how much lower the major averages are likely to go before they can bottom out. Many would be surprised to learn that in percentage terms the current decline has not yet been as severe as last spring’s correction.
The technical evidence does not yet suggest that a major top is in place but a significant drop below last spring’s lows will weaken the outlook. Therefore the current market decline should present some good buying opportunities, but I would not be aggressive until there are signs that the market is stabilizing.
Chart Analysis: The weekly chart of the Spyder Trust (SPY) is currently trading below the 40 week moving average (MA), which is at $138.06. This measure of support was just slightly violated in May but in October 2011 SPY dropped over 9% below the 40 week MA.
The Nasdaq 100 is tracked by the Powershares QQQ Trust (QQQ), and it has dropped 12.1% from the September highs. This is already close to the 12.6% decline that we saw earlier in 2012.
NEXT PAGE: Is a Market Bottom in Sight?
The SPDR Diamond Trust (DIA) has dropped further below its support at line b. This may have completed a rising wedge formation, which would have quite negative implications. DIA is currently down 7.8% from the September high at $136.48.
The iShares Russell 2000 Index (IWM) closed decisively below its uptrend, line e, last week and is now down 11.2% from the September highs.
What it Means: Before a sustainable market bottom can be on the horizon we need to see a sharp oversold rally. Based on the plunge last week a rally would have been expected by Wednesday, but instead the sharp decline means we may not see a rally until next week.
It would take a weekly close below the May lows to create a pattern of lower lows. For the SPY, this level is at $127, which is 6.5% below current levels.
Though I cannot rule out another 2-3% drop over the short term, the risk on the short side is too high now in my opinion to be buying an inverse ETF.
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