Stocks late Friday remain on track to post their worst week since May, and one of their worst overall in 2012.
Fears of the impending fiscal cliff, higher capital gains taxes, slower corporate earnings growth and new concerns about the bailout of Greece all are weighing on the markets.
Of all those concerns, the fiscal cliff remains front and center. A recent Bank of America report pegged the yearly tax increases at $470 billion and the spending cuts at $250 billion – that’s a combined $720 billion or 4.6% of GDP – a whole lot of fiscal shock.
What is concerning is that sliding U.S. markets are not yet in oversold territory, says Michael Arold, a model manager on the Covestor platform. He has become more cautious and says he reduced his long positions as of last week. He now has a 63% cash position in his Technical Swing trading model as he waits for more favorable market entries.
One of the indicators he is using to gauge when that might happen is the McClellan Oscillator. It helps to gauge both market breadth, as well as overbought and oversold conditions. Oversold readings above +80 often are followed by a short-term market pullback, Arold says. Conversely, readings below -80 often are followed by short-term rallies.
Right now, at a reading of -49, marked by the red and black line above, the McClellan is indeed oversold (readings below zero are in oversold territory). However, it is not yet at the extremes of late May, April or March of this year that helped to identify market entry points.
A breakdown, then subsequent strength in cyclical stocks that are tied to the economy could help to provide a better market entry signal, he says. Some of the ETFs that Arold continues to watch in that regard are the Materials Select Sector SPDR (XLB), the Market Vectors Steel (SLX) ETF, and Market Vectors Semiconductor ETF (SMH).
One other chart to watch is the volume-at-price support for the S&P 500. In the chart above, the grey and pink bars from the left show areas of concentrated price activity over the past three years. The longer bars tend to act as magnets, attracting the current price of the S&P 500 back to those popular trading ranges.
The current chart suggests that there is broad price support in the 1320 to 1350 range. If that support does indeed mark a turning point, it could come as little as 28 points lower from Thursday’s S&P 500 close near 1378.
A heavy-volume selloff could still blow through the price support area. That said, it is the next logical place to begin looking for a potential turning point.
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