With stocks falling to their November lows, a critical inflection point has been reached. A convincing breakthrough could precipitate substantial selling by chartists, traders other technicians who view the November low as a key support level. If stocks hold, it could conversely precipitate substantial buying by the technicians because they will take it as a successful test of the low, which for them is a classic signal for a bottom in bear markets.
Don Vialoux of the Tech Talk blogthinks the indexes will break below the lows but believes the chances of a sharp decline on a break below support are relatively low. Thats because momentum indicators already are substantially short-term oversold. For example, the Relative Strength Indicator (RSI) for the S&P 500 and S&P/TSX Composite Indexes are at the 30 level.
On the other hand, Jeff Pierce of the Zentrader blogwrites that the decline thus far seems to be building steam to the downside. There doesnt yet appear to be any signs of the panic usually associated with bottoms, in his opinion. For example, the VIX Index remains quite far below its spike of November.
Charts courtesy of StockCharts.com www.stockcharts.com and Tech Talk Blog