In last week’s Market Outlook, I cautioned readers that a 57-year pattern of seasonal weakness in the S&P 500 warned of a near-term decline in equity prices. That is exactly what we got with the S&P 500 down 3.5% for the week.

The Dow Jones Industrial Average was hit with its biggest one-week decline since 2011, losing 3.8%. Meanwhile, the Russell 2000 lost 2.5%, pushing the beleaguered small-cap index back into negative territory for the year.

#-ad_banner-#Bigger picture, however, as I said last week, “any short-term weakness that emerges this month is likely to lead to a better buying opportunity as the economy continues to strengthen into early next year.”

The defensive utilities sector was the only sector of the S&P 500 to post a gain last week, which supports my bullish bias in the Utilities Select Sector SPDR ETF (NYSE: XLU) first mentioned in the Oct. 27 Market Outlook. XLU rose 5.1% to a high of $46.79 last week, just below my upside target of $47. Last week’s weakest sectors were energy, materials and industrials.

Dow Theory Warns of More Near-Term Pain

In addition to the weak seasonality, another early sign of potential trouble came when the Dow Jones Industrial Average set a new closing high on Dec. 5, but the Dow Jones Transportation Average did not.

According to Dow Theory, this lack of confirmation between the averages puts the sustainability of the advance in both averages in question. Each day that goes by without a corresponding new high in the transports raises the red flag — and the likelihood of a correction — just a little bit higher. It will take a new corroborating closing high in the transports to confirm that last week’s market decline is over and that the larger 2014 market advance has resumed.

The next chart shows that last week’s move lower in the transports also confirmed a bearish head-and-shoulders chart pattern, which targets a decline to 8,550 that will remain valid as long as the 8,888 area loosely contains the average on the upside as overhead resistance.

Moreover, as long as this pattern remains valid, it portends similar upcoming weakness in the other major indices, which are positively correlated to one another. However, note that the transports can meet the 8,550 downside target and still not negate their larger major uptrend, as defined by the 200-day moving average, which is currently situated at 8,207. This is supportive of my overall positive outlook for U.S. stocks into the early to middle part of 2015.

Fear Gauge Supports Short-Term Weakness

Last week’s increase in market volatility also points to more downside in equity prices in the near term. The next chart shows that the CBOE Volatility Index, better known as the VIX or fear gauge, rose above its 50-day moving average at the end of last week. This indicates that investors are collectively becoming fearful enough to fuel a stock market correction.

The last time the VIX moved above its 50-day moving average correlated with the September correction. I discussed the negative implications of this rise in the VIX in the Sept. 29 Market Outlook, after which the S&P 500 declined by 8% into the Oct. 15 low. As long as the VIX remains above its moving average, currently situated at 15.80, last week’s market decline is likely to continue.

Some Good News in Gold

In the Nov. 17 Market Outlook, I pointed out that, despite some encouraging price activity, investor assets were still leaving SPDR Gold Shares (NYSE: GLD). I said it would take a sustained expansion in these assets back above the 21-day moving average to indicate that there is enough near-term bullish conviction to fuel a sustainable advance.

Investor assets have risen and remained above their 21-day moving average for the past week. This points to at least short-term upside in GLD and the gold prices it represents, perhaps similar to the advances that occurred between January and March and early June and early July.

Putting It All Together

The current Dow Theory non-confirmation, which led to a bearish chart pattern in the transports amid increasing investor fear, according to the VIX, sets the stage for at least an additional 3% decline in these averages and the broader U.S. market.

Bigger picture, however, as I said last week, any short-term weakness that emerges this month is likely to eventually lead to a better buying opportunity as the overall economy continues to strengthen into early to mid-2015.

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This article originally appeared on ProfitableTrading.com: Bears Are in Charge, but Gold Offers a Bright Spot