Some say you should sell as this is the beginning of a major bear market. Others say to hold because the market is just correcting an overbought situation. So, which is correct? 

The case for the bears: Yesterday, the S&P 500 closed at 1,329.47.  This is a violation of the support line that we’ve highlighted for over a week at 1,332. The S&P 500 also penetrated its intermediate trendline as (red broken line). And the Nasdaq’s 20-day moving average and its support at 2,800 were penetrated as it closed at 2,782.31.    

The case for the bulls: The S&P 500’s close is a minor violation of the support line and intermediate trendline at 1,332. The Nasdaq’s major support is at its 50-day moving average at 2,774, and the index turned up from its low yesterday at 2,780, which is a positive. The Dow Jones Industrial Average is now the leader, and it closed at 12,548, well above the support zone at 12,400 to 12,455. 

The charts’ major trends, both intermediate and long term, are still up, but the short-term trend is down. However, technical analysis gives preference to the major trends over the short-term ones. Also, the internal indicators, such as Moving Average Convergence/Divergence (MACD), stochastic and momentum, are now somewhat oversold, and the sentiment indicators, chiefly the contra-indicator, the AAII survey, show that the public is very bearish, and that is bullish for the market. In fact, bullish sentiment is the lowest it’s been in eight weeks.

The huge reversal in silver and other commodities has driven many players from the stock market. Institutional players began opting for safer, more defensive stocks over six weeks ago, but because the defensive sectors broke sharply higher last week, it appeared that a major shift in leadership had taken place. As noted, a shift to more defensive groups has been going on for weeks, and now the defensive sectors, like health care, utilities and consumer staples, are clearly overbought. Yesterday, of the defensive sectors, only health care made an advance, and that by just 0.1%. For those who bought it, is time to take trading profits.

But back to our major indices charts. The S&P 500 and Nasdaq show that a minor correction is in progress. That correction could extend farther into the midpoint of the support zones bordered by the black broken lines on the charts. Traders should pay attention to this zone. It is a broad area of support, so the pullback could even be quickly reversed following a minor penetration of the blue 50-day moving averages.

Prepare to buy some of our favorite stocks. Tomorrow I’ll include a list of the most favored stocks and sectors.

For one stock to buy now, see the Trade of the Day.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.