On Monday, stocks fell for the fourth straight day as investors pulled back in anticipation of more bad economic news. And the financial stocks again led the way lower. Are we headed straight down or is there a chance for a near-term rally?

There is no way to interpret the last four days of trading as anything but bearish. The S&P 500, as detailed in yesterday’s Daily Market Outlook, has violated important levels of support, including: its 50-day moving average; the 20-day moving average crossing through the 50-day for a near-term sell signal; the May low at 1,313 having been pierced; and the intermediate trendline at 1,302 having been violated. 

One of my favorite indices when charting longer-term trends is the NYSE Composite, which contains every stock traded on the New York Stock Exchange. It looks no better than the S&P 500, and in some respects is even more bearish. In addition to the various violations of major trendlines and moving averages, the NYSE Composite’s long-term bull market support line and 200-day moving average are just under 8,000 and close to being attacked. And the stochastic issued a strong sell signal late last week.

In addition to the broad-based indices turning down, other indicators are joining in a chorus of bearish sentiment. On Wednesday, the NYSE turned 20-to-1 negative breadth (declining volume over advancing volume), and the Nasdaq had an 11-to-1 down day. A reading of negative 8-to-1 is considered excessively bearish.

The financial sector has been the weakest sector ever since topping in February. The Financial Select Sector SPDR (NYSE: XLF) chart at first reading looks horrible. However, when a sector dives through important support in a straight line with little pickup in volume, the experienced technician thinks, “Aha, a possible capitulation!” In other words, it looks so bad that only a fool would stick with it. And when the last fool is out of a stock or sector, that is when a bottom is formed.

Note an ominous double-top, the substantial support at $14.50, and a grossly oversold stochastic. Volume is not yet high enough for a final selling climax, but it is possible that this sector is close to a one. Look for higher volume as the price falls within the major support zone followed by a reversal or series of reversals. Even a bounce from such oversold securities can provide a solid trading profit.

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.