Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

Volatility follows volatility, and as such, yesterday’s 4.42% drop in the S&P 500 is not surprising, although it could have happened in either direction. The focus du jour was on the French banks, which were under attack on vicious rumors about solvency issues, so financials led the sea of red lower today.

Looking at the S&P 500 daily chart, note that yesterday’s weakness almost fully erased all of Tuesday’s strength. That’s clearly not what the bulls want to see. It is important, however, to point out that as long as Tuesday’s low at 1,101.5 holds on a daily closing basis, the bulls still have valid hopes for that oversold rally. Days like yesterday are exactly the reason why I always stress that we need confirmation in the form of an up day after an oversold day signals a bounce.  

If we look at the weekly chart of the S&P 500, note that on Tuesday we bounced just about exactly at the 38.2 Fibonacci retracement level (1,101.5 on the S&P 500) of the entire move higher from March 2009 to May 2011. Should we break below there on a daily closing basis, the next stop could be closer to 1,020. 

As mentioned above, the banks lagged again yesterday, and the KBW Bank Index (BKX) closed at a new two-year low and also below Tuesday’s low. As is often the case, it is difficult to imagine more than just an intraday bounce without the participation of the banks and the financial sector as a whole.

Gold had another massive day yesterday, so much so that it’s not even worth showing the chart, because it is as vertical as vertical can be.

The U.S. dollar also had a good day yesterday, and so it is fitting that equities couldn’t sustain their bid. On the chart of the EUR/USD exchange rate, note the cluster of wildly long bars. Often after such volatile intraday action for a period of time, the asset in question will move in either direction sharply. I am pointing this out because whatever direction the EUR/USD breaks obviously affects which way the dollar index swings to some extent, which in turn affects stocks.

I wish there was more to say, analyze and otherwise dissect in this market, but until we either find a confirmed tradable short-term bottom or daily break below Tuesday’s lows, it pays to do less, observe and wait to pounce once opportunity is ripe.

• See Sam Collins’ Daily Market Outlook: Panic Seizes the Markets – What Now?
• See Sam Collins’ Trade of the Day: The Best Gold Miner to Buy Now
• See Serge Berger’s Trade of the Day: Place Your Chips on Intel