Can the market hang onto support?

Last Tuesday, I noted that a market decision was coming soon. It came sooner than I anticipated with a sell-off that broke the bullish trend line from the February lows. To wit:

"A major decision point is rapidly approaching which will decide the fate of the market for the rest of the year."

In the daily price chart below, the break of that bullish trend line is clearly evident.

"Notice in the bottom part of the chart the market currently remains on a sell signal. That sell signal is problematic for two reasons:

"1) 'Sell signals' combined with overbought conditions tend to lead to at least short-term corrections.

"2) 'Sell signals' formed at very high levels, such as currently, suggests limited upside and larger correction probabilities."

Let's zoom in on the recent price action in the chart above. The chart below is the last 3 months of daily price movement. As you will see, while prices have been quite volatile, there has been virtually no progress in the market during the period.

The most critical aspect of the breakdown currently is the very critical support line that is running at 2,125 now. That support line, as shown in the next chart below, is the breakout of the market from the May 2015 closing highs.

Again, you will notice in the bottom part of the chart, a "sell signal" has been triggered from very high levels. This signal alone suggests the market will have trouble making a significant advance from current levels until this condition is resolved.

Also notice, in the top part of the chart, the market is oversold on a weekly basis currently. However, when that oversold condition existed in conjunction with a "sell signal" previously, there was further downside left in the corrective process.

The biggest threat to investors currently remains the downside if earnings fail to gain tractionWith that being said, it is critical for the markets to "hang on" to current support at the previous breakout highs. A failure to do so will put the markets back into the previous trading range that has existed going back to 2014.

From a trading perspective, caution remains elevated and portfolios are underweight equities at this point until the current situation is resolved. Obviously, the biggest threat to investors currently remains the downside if earnings fail to gain traction, particularly due to the stronger dollar backdrop, as noted in this past weekend's missive.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of "The Lance Roberts Show" and Chief Editor of the "Real Investment Advice" website and author of The "Real Investment Daily" blog and the "Real Investment Report". Follow Lance on Facebook, Twitter and Linked-In.