Tuesday’s Tumble Pushes the Market to The Brink, and Maybe Past It

The stock market’s been on thin ice for a while. Tuesday’s selloff brings it back within striking distance of more serious trouble. Indeed, by some measures it may already be past its breaking point.

But first things first.

In this past weekend’s Weekly Market Outlook we pointed out the S&P 500 was close to testing a key support level around 4220, where the 200-day moving average line was close to intercepting straight-line support connecting last October’s and this March’s low. That floor is now being tested. One or two more bad days, in fact, could snap that floor.

Here’s a closer look at the same development with a more detailed daily chart of the S&P 500. The index is under its straight-line support (dashed), and is within easy reach of a move below its 200-day moving average line (green) at 4204.

Additional detail isn’t the only reason we want to take a look at the daily chart of the S&P 500, however. Just as important -- if not more important -- is the S&P 500’s Volatility Index (VIX). It’s testing a key technical ceiling right around 19.8 (yellow, dashed). That’s the last prospective peak based on prior highs, in fact, holding the VIX down. If it fails too, there’s little left to hold it down. This if course is bearish for stocks.

The red flag is the fact that the VIX is close to breaking above a technical ceiling at the same time the S&P 500 is close to breaking below an important technical floor. If both happen at the same time, that’s big-time trouble…. maybe.

And the NASDAQ Composite is playing along. That is to say, it’s on the verge of a major breakdown as well. Although it’s not yet testing its 200-day moving average line (green) at 12,542, it’s under all of its other key moving average lines. The 20-day line (blue) also broke under the 100-day moving average line (gray) today. Its big line in the sand here is the horizontal support at 12,998 (light blue, dashed), where it’s bottomed a few times over the course of the past week. If that floor fails to keep the index propped up, there’s not much left to hold it up.

And there’s good reason for doubt that this support will stand up to such a test. That doubt stems from the way the NASDAQ’s volatility index (VXN) is behaving. It finally punched through its technical ceiling at 23.3 (purple, dashed) on Tuesday, suggesting a more serious shift in trader sentiment… toward bearishness.

As always, none of these cues and clues are outright guaranteed to be accurate. We’re only using this information to help us -- and you – figure out the current odds of more selling, or the prospect for a turnaround.

An objective look at the odds these hints are making for us, however, has to lean bearishly.

Prospective downsides include the NASDAQ’s testing of its 200-day moving average line at 12,542, and the S&P 500’s 4,176 level. That’s where you’ll find a 38.2% retracement line… of the runup from last October’s low to July’s high. Interestingly, that level was also an important ceiling for the better part of the first half of the year.

As always, we’ll post updates if-and-when they matter.