The major U.S. indices managed to finish last week fractionally higher, led by the S&P 500, which gained 0.7%. However, nothing has been resolved as the broader market index, as well as the bellwether Dow industrials and PHLX Semiconductor (SOX) index, continue to hover just above major support levels. 

S&P 500 2,077, Dow 17,342 and SOX 630 are major support levels that represent an important inflection point from which the next significant move, either up or down, is likely to begin.  

Two weeks ago, I first stated that utilities were on my radar as a potential sector to overweight this quarter. And last week, I pointed out a bullish chart pattern in the Utilities Select Sector SPDR ETF (NYSE: XLU) that targeted a 4.8% rise to $46.50. 

XLU jumped 2.7% last week and appears to be on track to meet that target, which is 2% above Friday’s close.

The chart also shows that XLU is starting to edge above its 200-day moving average at $44.99. A sustained rise above this widely watched major trend proxy would suggest that a major bullish trend change is emerging in the ETF, which would potentially set the stage for an even larger advance in the weeks and months ahead.

AAPL Meets Initial Downside Target 

In last week’s Market Outlook, I focused on Apple (Nasdaq: AAPL), one of a handful of market-leading technology stocks that have been warning of a deeper decline in the broader market. I said the recent breakdown from more than five months of sideways investor indecision targeted a 5% decline to $109.75. That target was quickly met when AAPL hit a low of $109.63 on Wednesday.

AAPL is particularly important because it is the largest U.S. stock according to market capitalization and is positively correlated to both the S&P 500 and Nasdaq 100. So, as goes AAPL, so is likely to go the overall market.  

Allow me to point out two additional things on the chart: 

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1. AAPL’s major trend is now down (bearish), according to its position below the 200-day moving average at $121.45.

2. The next underlying support level is 9.8% below Friday’s close at the $104.63 January low.  

If AAPL is indeed in the early stages of an emerging bearish trend, it does not bode well for the broader market.

Investor Complacency At An Extreme

Another key market influence worth considering is the current extreme level of investor complacency according to the Volatility S&P 500 (VIX), which finished last week at 12.83. 

In the previous report, I pointed out that a VIX reading at or near 12 has either coincided with or closely led every near-term peak in the S&P 500 over the past 12 months. So history tells us the S&P 500 is going to have a tough time beginning a sustainable advance from major support at 2,077, which is currently being tested, without a deeper decline first.

Focus on Semiconductors This Week

Weakness in market bellwethers like AAPL and low volatility are good secondary indicators that will often lead a directional move in the major indices, but how these indices actually respond to major support levels is really the only thing that matters.  

In the past few issues, I have been pointing out major support levels in a number of indices including the S&P 500 and Dow, but the index that may be most important this week is the PHLX Semiconductor (SOX). Semiconductors tend to lead technology stocks, which tend to lead the broader market.

SOX has been hovering just above its November 2012 major uptrend line since late July. It closed right on top of this trendline at 630 on Friday. 

It would take a sustained decline below 630 to indicate that the correction the stock market has been warning of for months is finally getting under way. Conversely, as long as 630 holds as support, it is too early to assume that a deeper market correction is beginning.

Editor’s note: Profitable Trading’s Jared Levy recently alerted his followers to a bearish chart formation that signals a sell-off in another market-leading index. He also recommended a trade that will generate a 34% profit in a little over three months, or 122% annualized, if the index falls just 3%. Trades like this will be invaluable when the market starts to fall. Click here to prepare.

Time To Pay Attention To Gold

For the past several months, data from the Commodity Futures Trading Commission (CFTC) has indicated that commercial hedgers — “smart money” market insiders — were betting that gold prices were undervalued and due for a rally. However, as I mentioned in late June, the missing ingredient to a sustainable rise in gold prices has been a lack of bullish conviction by everyday investors. 

I measure this conviction by watching ETF asset flows, specifically those invested in the SPDR Gold Shares (NYSE: GLD) relative to their 21-day moving average, as this indicates if they are in a monthly trend of expansion or contraction.

These assets have been contracting on a monthly basis since March, which means that investor dollars have been coming out of the ETF. This is an important reason why it has been declining, along with the price of gold.  

The chart shows this trend of monthly contraction was challenged on June 29 but failed, which sent GLD tumbling to fresh lows. These assets are challenging their moving average from below once again, which indicates another inflection point from which gold either begins a price rally or once again collapses to fresh lows.

Although it is too early to buy gold, it is now time to start paying closer attention. I will keep you posted on how this developing situation resolves itself, as it could indicate a long-awaited new buying opportunity in the yellow metal.

Putting It All Together 

As was the case a week ago, a number of key U.S. stock indices began this week situated right on top of major support levels. It is from these major inflection points that either their larger bullish trends will resume or a long overdue corrective decline will begin. Right now, the weight of evidence, including the recent major bearish trend change in AAPL and historically low volatility, points to a bearish resolution. But a sustained decline below 630 in the SOX index would be necessary to confirm this.

If a stock market correction does emerge this quarter, the defensive utilities sector should continue to outperform the S&P 500, while U.S. interest rates decline as investor assets move out of equities and back into the relative safety of U.S. government bonds.

This article was originally published on ProfitableTrading.com: The Most Important Chart to Watch This Week.