The market to me looks like a drowning swimmer. Continually bobbing to the top, but not making any headway. Breadth is narrower as breaths are shorter. Did the last gasp come on Friday? Too early to tell, but it could be a long way to the bottom of this murky lake. It won’t take much more selling until traders will be looking at the October lows as a possible support. I’m getting a little ahead of things with that last comment. There are still some positives out there.

The VIX spiked today. Bulls are declining and bears are on the rise. People are starting to get worried about this action. Several measures of “oversold” could be reached quite easily within the next day or so. In other words, we may quickly be “due” for a bounce. (A good bounce to sell into, perhaps.)

Also on the plus side is there is still plenty of fuel in the form of “potential leadership”. Last week I mentioned I was seeing a good number of stocks setting up in basing formation. That hasn’t changed. They just aren’t moving out en masse. Those that are moving out aren’t doing so with much vigor, either. So there’s fuel, but still no fire. Should the market roll over, that fuel will disappear and all those basing formations will look like consolidations that lead to breakdowns.

The negatives are starting to outweigh the positives, though. There is no upside momentum right now. The market is showing distributive action. (Three of the last five days the S&P 500 (SPX | Quote | Chart | News | PowerRating) has declined on higher volume.) Breadth is narrowing. The Nasdaq (COMP | Quote | Chart | News | PowerRating) is lagging. Bonds are beginning to break down. On top of all that it will soon be three years since the last time the S&P 500 underwent as much as a 10% correction. That is a very long time in between corrections. A 10% drop from the 2/27 intraday high would put the S&P 500 a fraction below the October lows.

While there are still support levels left (1245 being the most significant for the S&P), it’s starting to look more and more to me like we will be testing those October lows of 1168 sometime in the not-too-distant future. If they break, then the April lows around 1136 aren’t too much further. A break of that level could really make things interesting (and scary).

I don’t think it’s going to be a straight shot, though. As I noted above, the market is already starting to look oversold after just a day and a half. Therefore, the downtrend should start out as a choppy drift lower with numerous opportunities to short bounces, before possibly accelerating and then capitulating in the next bottom.

Be careful about having too much intermediate-to-long-term money committed to the long side right now. Look for short opportunities if you have that in your arsenal. If not, keep it light on the long side.

Good trading,
Rob