The Market is Headed Even Lower — But When?

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

After an ugly close Wednesday, traders were greeted with much lower futures Thursday morning, indicating a lower open in the major U.S. equity indices. Relative to the extremely poor open, stocks remained in a range all day, albeit in a downward trending one.

The daily chart of the S&P 500 shows that, after six weeks in development, the bear flag finally broke to the downside. The index closed near the 1,130 mark, and as such, below what was medium-term support near 1,140.

On an intraday basis, the index Thursday reached 1,120, which in August served as a daily closing level several times. Thursday was, broadly speaking, the third time that the S&P 500 tested 1,120 since early August. Two points on that:

1. Technical analysis considers triple-bottoms and triple-tops to be somewhat of a myth.

2. The more a support or resistance level gets tested, the less its chances of holding as support/resistance.

Stochastics, too, indicate that the index has more room to the downside.

As we have now broken out of the bear flag, it�s time to take a closer look at possible downside targets. The weekly chart of the S&P 500 indicates the area between 1,010 and 1,050 to be somewhat of a magnet because of the support it had served in 2010. Additionally, the 23.6% Fibonacci extension level of the move from the July highs to the August lows comes in at 1,040.

The U.S. dollar rallied again yesterday in the inverse correlation to equities and gold I have spoken about for some time in this column. The long end of the U.S. Treasury bond curve also rallied in part because of risk aversion and in part due to the Fed�s announcement on Wednesday.

I highlighted the early warning signals from the transportation stocks earlier this week, and sure enough, yesterday they fell out of their consolidation phase (white lines) on good volume. See the chart of the iShares Dow Jones Transportation Average (NYSE:IYT) below.

Materials, silver, gold and just about everything else traded lousy yesterday. The energy sector, in similar fashion to the transportation stocks, also fell out of a consolidation phase as can be seen in the chart of the Energy Select Sector SPDR (NYSE:XLE). This indicates lower levels in due time.

At this stage, it more likely than not just a matter of time before the S&P 500 drops below the 1,100 mark, but therein lies the complexity. Time is most often much more difficult to forecast than price.

• See Sam Collins� Daily Market Outlook: How to Survive This Market
• See Sam Collins� Trade of the Day: Bail on This Weak Semi Stock Now