Can buyers emerge to salvage the penetration of the support line?

Stocks sold off yesterday as Italy��s bonds broke above 7%, a level at which economists say the country cannot sustain its debt service. The euro fell 2.1%, its biggest drop in six months, while the U.S. dollar and U.S. Treasurys rallied.

At the close, the Dow Jones Industrial Average fell 389 points (3.2%), the S&P 500 was off 47 points (3.67%), and the Nasdaq fell 106 points (3.88%). Volume on the NYSE increased to 1.1 billion shares and 599 million shares traded on the Nasdaq. Decliners outnumbered advancers on the Big Board by more than 9-to-1 and 7-to-1 on the Nasdaq.

All 10 S&P sectors were down yesterday as the index turned down from its 200-day moving average. The index experienced its worst loss since mid-August, driving it through its near-term support at the 20-day moving average and the former neckline at 1,260.

The index finally closed the day at 1,229 within the band of support at 1,220 to 1,230. The MACD internal indicator, which had been stubbornly holding, flashed a clear sell signal. The next support for the S&P 500 is at 1,220 followed by the 50-day moving average at 1,200.

The CBOE Volatility Index (VIX) rose over 8 points to 36.16, which places it back into the deep danger zone. The VIX is not accepted as an accurate forecasting tool, but holding consistently above 30 is historically symptomatic of bear markets. (Option trades are a great way to play this bear market.)

Getting back to the S&P 500��s chart, on Tuesday the index closed just 2 points above its 200-day moving average and yesterday reversed sharply from it and the bearish resistance line. This is the second time that the S&P 500 has reversed from its 200-day moving average. The first was late in October resulting in a 5.5% fall that took three days to develop. But today��s reversal dropped the index 3.67% on a huge imbalance of volume and a lower high than October��s failure.

Conclusion: Yesterday��s fai! lure on greater volume, which plunged the indices through major support lines, should not be ignored as an anomaly. The fact that the reversal was made from a lower high is significant, but so are the multiple internal sell signals: MACD, stochastic and momentum all turned negative. The sole hope for the bulls is that somehow buyers will emerge to salvage this decline from a penetration of the support line at 1,220. A violation of that number could result in a dramatic sell-off and an ultimate test of not just the 50-day moving average, but the October low.