Expect a Quick Fail and Rally

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

It wasn�t a pretty start to the fourth quarter yesterday as stocks again tumbled. Small caps, transports, financials and energy led the way lower.

The Russell 2000 closed down 5.38% on the day, leaving behind a solid break of its recent support zone at 640. The index is now nearing a support area between 580 and 600 that dates back to 2010. That doesn�t mean the index must reverse course there, but it does mean that the likelihood of it at least slowing down or bouncing somewhat in that area is high.

The S&P 500 yesterday closed below the weakening support line I have highlighted so often in recent weeks. The close marked a new daily closing low for the year right at the crucial 1,100 level. My best guess here is that after hitting such a big level (1,100) that has found itself all over the news, a quick fail and rally is likely.

It would be feasible to see a drop below 1,100 to shake out some stops only to then rally back above 1,100 for a little consolidation before at some point failing lower again. Before we can stage a more meaningful rally 1,040 still looks like a good target, but given the current volatility it is a better target area rather than an absolute level to focus on.��

The EUR/USD cross rate meanwhile is slowly coming into a support area near 1.30 � 1.31 that should be watched. The area served as support earlier this year and also is between the 61.8% and 50% Fibonacci retracement level from the summer 2010 to spring 2011 rally. It is conceivable that a bounce in the cross rate would occur somewhere in that area, which might coincide with an oversold bounce in equities. Watch the euro and the U.S. dollar for clues as to when equities might find a bounce level.

Apple (NASDAQ:AAPL), along with other large-cap tech stocks, continues to slide lower as more funds sell winners in order to reduce long exposure. Note the support zone coming into play between $350 and $360 by the 200-day simple moving average and a trendline. Given the importance of this stock, it is worth keeping a close eye on as it too could give us clues for when the broader market may be due for an oversold bounce.

The coming days will be choppy as I suspect the quicker hitters will try to gun some stops placed at the key 1,100 level on the S&P 500, which then may lead to snap higher for a trade.