The sharp decline Wednesday in many of the S&P 500’s key sectors has some investors worried about a much sharper decline, but MoneyShow’s Tom Aspray reviews the technical evidence to show why now may not be the time to turn bearish on the stock market.

The positives from turnaround Tuesday did not last long as stocks were hammered on Wednesday and there was no late buying at the day’s lows. The focus is still on the crude oil market, which—though oversold—shows no signs yet of a bottom. For the February contract, the monthly projected pivot support stands at $56.11.

The market internals were 5-to-1 negative on Wednesday with the ARMS Index closing at 3.47. This is the highest level since the 3.42 reading on February 4 as the market took off to the upside two days later. It was soon clear that the correction was over.  The prior high reading of 2.65 on August 27, 2013 was followed by a market low just three days later.

The overseas markets are mixed in early trading despite the news that China was pumping another $65 billion into its banking system to boost lending. This morning’s Retail Sales report, if better than the expected 0.4% gain, may help to stabilize the market.

Today’s review of the technical outlook for the key market indices will demonstrate why now may not be a good time to turn negative on the stock market.

chart
Click to Enlarge

Chart Analysis: The 1.7% decline in the NYSE Composite pushed it well below the daily starc- band on the close.

  • The quarterly pivot at 10,789 was also violated, which makes Friday’s close important.
  • The quarterly projected pivot support is at 10,470 while the weekly starc- band is at 10,390.
  • The NYSE Advance/Decline Line has dropped well below its WMA, which is now turning lower.
  • The A/D line made a new high on November 26 (line b), though the NYSE Composite did not.
  • The fact that it has been stronger than prices is positive.
  • To complete a top, the A/D line needs to stage a failing 2-3 day rally.
  • The McClellan oscillator has dropped to -243 and is back to the August and October lows.
  • The last similar oversold reading occurred in August 2013.
  • It will take several days before the oscillator could complete a bottom.
  • There is first resistance now at 10,800-10,880 and the declining 20-day EMA.

 

The Spyder Trust (SPY) was down 1.60% and also closed at new lows for the month. The quarterly projected pivot resistance at $208.43 was tested last week before the recent slide.

  • There is next important support in the $200 area, which is 1.5% below Wednesday’s close.
  • The 38.2% Fibonacci support from the October lows is at $198.25.
  • The quarterly pivot is at $196.19 with the 50% support at $195.09.
  • The S&P 500 A/D line has dropped below its WMA but made a new high last week.
  • If the SPY makes another new high in the next week or so, a short-term negative divergence could form.
  • The daily on-balance volume (OBV) did form a negative divergence at the recent highs, line f.
  • The OBV is below its WMA but is now testing further support.
  • There is first resistance at $205.80 with the declining 20-day EMA at $206.46.

 

Next: Two More Key Market Indices to Watch

|pagebreak|

chart
Click to Enlarge

The Powershares QQQ Trust (QQQ) hit the chart’s trend line resistance (line a) at the end of November.

  • The monthly projected pivot support is at $102.37.
  • The 38.2% Fibonacci retracement support at $100.44.
  • The Nasdaq 100 has been acting stronger than prices as it made a new high last week, line b.
  • The A/D line has dropped slightly below its still rising WMA.
  • The daily OBV also made a new high last week, line c, and is still above its rising WMA.
  • The OBV has more important support at the September highs, line d.
  • The monthly pivot is at $104.37 with stronger resistance at $105.50-$106.
  • The daily starc+ band is at $106.98.

 

The iShares Russell 2000 (IWM) was down 2.12% on Wednesday as it gave up Tuesday’s impressive gains.

  • There is chart support now in the $114-$114.45 area (line e) along with the monthly projected pivot support.
  • The lower daily starc- band is at $113.32 with the quarterly pivot at $112.95.
  • The 50% Fibonacci support is at $113.06.
  • The Russell 2000 A/D line, like prices is still locked in a trading range with resistance at line f.
  • A move above this resistance will confirm the leadership of the small-cap stocks.
  • The daily OBV has been acting stronger than prices as it has made higher highs, line g.
  • It is still slightly above its rising WMA.
  • The weekly OBV (not shown) is still well above its WMA.
  • There is minor resistance at $116.43 with key resistance at $118.43, which is the December high.

 

What it Means: The S&P futures are up in early trading ahead of the Retail Sales report. It would take a close in the futures back above the 2060 level to stabilize the outlook.

As of now, there is no technical confirmation that a top is in place and the high ARMs Index does raise the possibility that Wednesday was a panic low. To support this, we will need to see a strong multi-day rally by the middle of next week.

If, instead, the market stages a weak rally in the next week that allows the WMAs of the A/D and OBV to roll over, then we could see a sharper decline into the end of the year.

From an intermediate standpoint, the new highs in the A/D line support The Bull Market Is Only Half Over as the longer-term outlook is positive.

How to Profit: No new recommendation.

Portfolio Update: As per the December 4 Tweet. Traders are 50% long the iShares Russell 2000 (IWM) at $116.88 and added 50% long on Tuesday’s open at $114.96, which was well below the second buy level at $115.66. Use a stop at $109.44. On a move above $118.60, raise the stop to $113.88.

Editor’s Note: This will be the last Charts in Play column until the New Year as I will be taking two weeks off. I will still keep an eye on the market, and for changes in the market outlook over the holidays, watch my Twitter feed.