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

Friday morning greeted us with lower equity futures, and the S&P 500 closed the day down 2.53% bringing its two-day sell-off to 3.7%. The weak August jobs report led more investors to again embrace the “risk off” trade as they sold equities and piled into gold, silver and bonds. August job growth was zero making it the weakest performance for non-farm payrolls in almost a year.

The rally in the 10-year U.S. Treasury note pushed its yield below 2%, to 1.99%, and just a smidge off its all-time low of 1.97% set last month.

The S&P 500 found support right at the key 61.8% Fibonacci retracement level of the rally from Aug. 26 to Aug. 31 (month-end rally). While the index is holding on by a thread here, it is also noteworthy that the MACD has not yet reached overbought territory and our 1,240-1,260 area on the upside hasn’t been met yet. By the way, that area corresponds with a retest of the 50-day simple moving average from underneath, which is something the S&P 500 has almost always done after breaking multi-year uptrend moves such as it did in early August.    

The 30-minute chart also reveals an upward trending cone shape in place. Should the 1,167 area significantly fail to hold on a daily closing basis, I believe the relief rally will have run its course and the S&P 500 could again head toward 1,100 and below.

It is important to keep last week’s low volume performance in mind, because it means that price action should not be taken as seriously as usual. Most players return to their desks this week, which could push prices in an entirely different direction than what the indications were last week. 

Because a good amount of the recent market weakness was Europe-driven and will continue to affect theU.S.markets, I want to look at the German DAX large-cap equity index. Like many European indices, the DAX is down more than 20% year to date, and technically broken.

The weekly chart shows that the index held the important support area near 5,250 in the August sell-off. That area served as resistance and then as support in 2009. Given the vertical attack on this support area, it is likely that, after a potential bounce, it will ultimately fail to hold. 

The all-important monthly chart of the German DAX looking back to 1998 shows a clear lower high in place in 2011 versus the highs in 2007. Additionally, note the uptrend line dating back to the lows in 2004, which may also indicate the index has significantly lower to fall.  

There are numerous other ways in which to show the weakness in European andU.S.equities, and I will point them out over coming days and weeks. For now, let’s note the longer-term weakness displayed in the German DAX and major chart failure in the S&P 500, all of which are indicating lower levels ahead.

The trick to the trade, however, is not so much in determining how low these indices will fall, but rather when they will again start their downward spiral and when will they eventually find support. In the very near term of a couple of days to a couple of weeks, I still see a little continuation of the oversold bounce, although as discussed above, a significant daily close below 1,167 on the S&P 500 in coming days would indicate that the bounce is over.

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