THE STOCK MARKET'S TECHNICAL CONDITION CONTINUES TO WEAKEN -- IMPORTANT SUPPORT LEVELS ARE BEING TESTED OR BROKEN

NASDAQ CONTINUES TO LEAD MARKET DECLINE...Stocks are suffering through another bad week, with the  Nasdaq market continuing  to lead the decline.  The Nasdaq Composite Index has also suffered the most technical damage.  It fell below its 200-day moving average last week.    Chart 1 shows the COMPQ falling below its October low this week to reach the lowest level since last June.  It's also the first major index to fall into correction territory with a loss of more than -10% from its November peak.   The Nasdaq 1o0 is also nearing a test of important chart support.  Chart 2 shows the QQQ falling below its 200-day line and nearing a test of its October low.  Heavy trading activity during this week's selloff is another negative sign.   The Dow and S&P 500 are also testing important support levels.

THE DOW BREAKS ITS 200-DAY LINE...THE S&P 500 MAY BE NEXT...Chart 3 shows the Dow Industrials trading below their 200-day average in afternoon trading.  The next level of potential support is the early December low.   Chart 4 shows the S&P 500 falling below its early December low and threatening its 200-day line.  Odds for it holding aren't encouraging.   As of Thursday's close, only 55% of the S&P 500 stocks were still trading above their 200-day averages.   That means that nearly half of SPX stocks have already fallen below that long-term support line.

SMALL CAP INDEX FALLS TO 52-WEEK LOW... Last Friday's message showed the Russell 2000 iShares (IWM) testing important chart support along last year's low.   Chart 5 shows that small cap index falling this week to the lowest level in a year.   That's a bad sign for small caps and most likely for the rest of the market.   This week's trading pattern has also been discouraging in the sense that stocks have been unable to hold onto to earlier intra-day gains.

BUYING DIPS HAS CHANGED TO SELLING BOUNCES... Previous market drops over the last year were supported by a philosophy of buying the dips.   This week's trading, however showed traders and investors selling into market bounces.   That's been especially visible with heavy selling late in the day reversing earlier gains.   That change in philosophy strongly suggests that the market's current selloff could be longer and deeper than earlier ones.