On Friday, there were several positive economic reports. But with theU.S.stock market keyed to negative developments inEurope, selling dominated the trading floors for the entire session. In addition to a disappointment over a jump in Europe’s inflation rate, which halted any possible rate cut by the European Central Bank, weak Chinese manufacturing data hung over the market all day.

The S&P 500 chalked up its eighth week of losses in the last 10. And the Dow Jones Industrial Average ended the third quarter with a decline of 12%, its biggest percentage drop since the first quarter of 2009.  

Among technicians there are differing opinions regarding the value of long-term charts. But since 1999, the simple 17-month moving average has had an uncanny record of success. On Sept. 1, the Daily Market Outlook applied this type of chart to the S&P 500, and it showed that a bear market signal had been issued at the end of August. At that time, the red moving average had barely penetrated the black price line. Now, however, the signal is very clear with the S&P closing 87 points lower than the original sell signal.

And there was more advice to sell. As early as Aug. 17, I gave explicit warnings of an impending bear market: “And overhanging the charts are numerous bear market indicators including a major head-and-shoulders neckline break, a Dow Theory bear market signal, massive downside volume accompanied by enormous negative breadth, and the crossing of the 50-day moving average through the 200-day moving average.” 

Then, on Sept. 6, readers were alerted that a bear market flag had appeared and that “flags like this one usually break lower.” 

And so September closed out with a plethora of bearish signals. But that was then and this is now. On Sunday, Reuters reported that “Greecewill miss deficit targets set just months ago in a massive bailout package.” They also said that a budget deficit for this year, forGreece, is higher than first expected.

And in theUnited States, more economists are projecting a double-dip recession. Therefore, the pressure is still on the stock market, and we may open the month with a sell-off. But the market is approaching the trading zone of last summer, which could provide significant support.

In order to clarify a trend, I often go to the broad-based NYSE Composite. Note that the NYSE is somewhat oversold, and like the other indices probably due for a bounce. But in contrast to the S&P 500, its recent fall has penetrated deeply into last summer’s support zone with its recent bounce from a low of 6,641, which is comparable to the final low of last summer at 6,595. The overall low of last summer was 6,356, and that would be comparable to 1,019 on the S&P that was mentioned on the Daily Market Outlook on Sept. 29.

Conclusion: There is little doubt that we are in a bear market. However, the market is oversold and due for a bounce after the S&P 500 and the NYSE Comp have penetrated into last summer’s zone of support. Therefore, it would be wise to cover profitable short positions on any deep thrust into that zone and wait for another short-selling opportunity. Rallies in bear markets can quickly wipe out hard won gains, so don’t overstay a move into a broad support zone. (For more bear market strategies, check out what my colleague Joe Burns is trading.)

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.