Markets At Crossroads, Correction Looms

Last week was tough for the bulls, and here's the damage.

The NASDAQ led the way to the downside, sliding nearly 2.5% for the week.

The S&P 500 fared slightly better though, declining just 1.3%.

For the month of March, the S&P 500 is currently lower by about 1.7%, and the NASDAQ is down roughly 2.5%.

As I said last week, investors really need to be patient here. As it is still too early to confirm the recent high as the top of this intermediate-term uptrend.

Late last year, we witnessed a similar four-week correction that ultimately set the stage for a substantial multi-month move to the upside. (Image: crazyad0boy on Flickr)

First though, lets focus on the short-term trend. Here is an intraday look at last week's price action. Keep an eye on critical psychological support near 1295-1300 (S&P 500), this is a key area to watch, as well as last Friday's low near 1292

 

 

In the prior update, I mentioned that we may be in the process of forming a short-term trading range, and I highlighted this area on a daily S&P 500 chart. As of Friday's close, this trading range was still intact.

The market is definitely at a major turning point here, so its critical that we remain objective when other investors act wildly emotional. We maintain objectivity by sticking to our time tested rules and indicators.

Prices have already violated a key support level that had remained intact for a majority of this uptrend, the 20-day MA (1313). This move immediately puts us on alert. Now, we look ready to test the 50-day MA (1297), and if this level is violated, the chance of entering an intermediate-term correction rises dramatically.

 

 

But with all that said, I'll keep repeating the following statement until it inevitably follows through. Once again, the confirmation of a lower low, or high, would be a good first step for the bears. For now though, key market indices continue to confirm higher lows and higher highs.

What levels are we looking for here? Well on the NASDAQ, this means a clear breakdown below 2500, and on the S&P 500, we would need to see 1230 taken out.

Again, let me point out that from top to bottom, this decline is really no worse than the four-week sell off we witnessed late last year.

So, our focus remains squarely on the 10-week moving average support line. While the S&P 500 managed to avoid a violation of this key level last week, the NASDAQ wasn't as lucky. For the first time since September 2010, the benchmark technology index closed below its 10-week MA.

While increasingly unlikely as the markets grind lower, it still appears as though the NASDAQ may be setting up for a key retest of the 2007 bull market high. On October 31st, 2007, the benchmark index hit 2861, a level that would ultimately serve as the peak of a five year bull market. A clean breakout through this highlighted resistance level would be an important psychological milestone for this bull market.

Key intermediate-term levels to watch on the NASDAQ include resistance at the 2007 bull market high (2860), and support near 2700.

On the S&P 500, keep an eye on resistance near 1350, and the 10-week moving average support line near 1300.

 

 

Our Dow Theory outlook has been updated with new potential intermediate-term support levels. These areas have been circled in blue.

The Dow Jones Industrial Average and the Dow Transports simultaneously confirmed new bull market highs recently, and key intermediate-term support levels have been updated accordingly. There are no other changes to our Dow Theory outlook, and we remain on a long-term buy signal.

 

 

The Dollar Index added about .5% last week, after declining 1.1% two weeks ago.

The next critical intermediate-term support level to watch sits near $75.00.

At this point, the long-term trend is still bearish, as we remain on a 10/40 week MA sell signal.

 

 

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