With pretty much all major indexes pointing toward a lower market open this morning, it's time to think about the scary reality of the that stocks are facing right now... Welcome to the failure zone:
The bears are starting to sway the market right now, and it looks like the rest of the week could see things significantly lower. The "Failure Zone" -- that area between the red lines in the chart above -- is the area to watch in the next 2-3 trading sessions.
For the last few months the market has been in a series of rally and slide cycles generally lasting around a month. At the beginning of November, as the S&P 500 bounced off trend channel support (the lower blue line in the chart), it looked like we were starting yet another month-long cycle with a price target of around 1150.
But stocks hit the brakes early in the week, giving already nervous investors even more reasons to turn bearish. So, should you be worried right now?
Probably not.
While seeing the S&P make it up to trend channel resistance (the upper blue line) before turning tail would have been an ideal situation from a technical point of view, with the current cycle top only around 4% shy of that target level, we can safely assume that the market's just following its own rules right now.
And with the 50-day moving average AND trend channel support sitting well above 1050 right now, the market has a double safety net to fall back on.
Prognosis: Expect a couple weeks of losses down to the strongest of those two support levels.
But what about that "Failure Zone" in the chart above? The Failure Zone is basically the area that determines where stocks are headed in the short term. If stocks manage to break out above the danger zone, we'll likely make it to that 1150 cycle target that we were hoping for at the beginning of the month. If stocks continue to push below it, then expect that move down to support to happen sooner rather than later.
Either way, it seems pretty clear that a pullback is in store in the next month...
