The stock market saw little volatility last week, but pushed below a key support level. Now is a time to become cautious.

Consolidation Could Be Giving Way to a Small Decline
SPDR S&P 500 (NYSE: SPY) closed down for the second week in a row. SPY fell 1.56% as the market continued to consolidate its gains after an eight-week winning streak.#-ad_banner-#​

Traders understand that markets move up and down over time. On a long-term chart, we often see a recurring pattern of price rises followed by pullbacks. Pullbacks are healthy for a bull market because they allow the fundamentals to catch up to the price action. Since the purpose of a pullback in a bull market is to allow time for fundamentals to catch up to prices, a consolidation can substitute for a price decline.

A consolidation is a period of time when prices make little progress to either the upside or the downside. Consolidations can be boring times for many traders, but we could be about to enter a more exciting time. After a one-month period of little price progress on the daily chart, we could be seeing a breakout to the downside.

The trading range that began on Nov. 14 is highlighted on the chart. Prices dipped below that on Friday, and additional downside should be expected if SPY drops below $178 again.
 
I continue to look for only a minor pullback in the stock market moving into the end of the year, and I believe that pullback could be under way. The lower edge of the previous trading range near $174 is a reasonable target where support should be expected. A break below that would require a reevaluation of the state of the market.

Gold Traders Not Likely to Get Any Clarity From Fed
SPDR Gold Shares (NYSE: GLD) gained 0.7% last week as news stories seemed to drive the market.

News from the gold market is filled with speculation about fiscal and monetary policy changes. When Congress reached a budget deal, gold fell on the news. Stable fiscal policy could be bearish for gold since budget deficits shouldn’t grow excessively if spending is constrained.

With fiscal policy again on the back burner, gold traders are now more focused on monetary policy. Federal Reserve policy is also likely to be stable for the next year or more, although the timing of small changes in policy could trigger large short-term moves in gold.

The Fed might be seeking to reassure traders. Officials understand that markets are jittery, and they are likely to do all they can to communicate their intentions to the market while taking steps to minimize surprises. With the chance of a surprise low, gold may be settling into a trading range.

Gold and other commodities tend to form consolidation patterns as they bottom.

For example, while bottoming after an extended bear market that lasted about two decades, gold traded within a relatively narrow range for about five years. The size of the range ($100) was about 20% of the midpoint of the range (with $540 being the top and $440 the bottom of the range).

Gold is more than 35% below its all-time highs and has suffered a bear market. Declines of 20% or more are usually defined as bear markets. Before gold begins a new bull market, I expect to see a bottom form over an extended period of time. Until we have a consolidation pattern on the chart, which we are months away from, gold is unlikely to make a large upside move.

Traders should continue looking elsewhere for better trading alternatives.

This article originally appeared on ProfitableTrading.com:
Caution: Market Could Break Out to the Downside