All major U.S. indices closed lower last week, breaking six straight weeks of gains from the late-September lows. The tech-heavy Nasdaq 100 and small-cap Russell 2000 led the way down, both posting 4.4% declines.

As has been the case for most of this unusual year, investors have been optimistic enough buy virtually every minor pullback since January. At the same time, they’ve lacked the conviction to push the major indices to new highs. I’ll discuss this phenomenon in more detail in a moment and share a key to getting an early read on the market’s next move.

Last week’s market collapse was led by the economically sensitive energy sector, which lost 5.5%. Recent weakness in crude oil and industrial metals like copper, which I’ll cover this week, has revived fears of global deflation. That fear is at least part of the reason the stock market took it on the chin last week.

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A Tale Of Two Levels

In last week’s Market Outlook, I pointed out that the market-leading Nasdaq Composite was testing its tech-bubble high at 5,133 for the fifth time this year. As I’ve been saying, if the index can stay above this level, we are likely to see a nice technology-led broader market rally into year end. A failure to do so, however, would warn of yet another pullback, perhaps to the 200-day moving average.

The Nasdaq Composite collapsed by 219 points, or 4.3%, last week. It closed at 4,928 on Friday, slightly below the 200-day moving average at 4,956.

Now that the market has once again shown a lack of conviction to take major indices to new highs, I am looking for the necessary optimism to buy a good pullback. The next chart offers a good place to look for that optimism’s emergence. 

The chart of the benchmark S&P 500 index shows that last week’s decline resulted in a test of important minor support at its 2,021 Sept. 17 high. This level is important. It is where new buying pressure must come back into the marketplace for the 2,135 upside target of the bullish double-bottom chart pattern I identified in the Oct. 19 Market Outlook to remain valid and intact.

However, a break of the 50-day moving average at 2,008, which is located just below the September high, would suggest investors have collectively decided the bullish implications of this pattern are no longer valid. That would clear the way for a retest of the September and August lows at 1,867 and 1,872, respectively. These lows sit 7%-8% below Friday’s close. 

How To Tell Which Way The Market Is Leaning

One simple but effective way to determine whether optimism or pessimism is winning out as the S&P 500 negotiates 2,021 support is to measure the level of investor fear in the market via the Volatility S&P 500 (VIX).  

The next chart plots the VIX in the lower panel with its 50-day moving average, which I use as a baseline to determine whether day-to-day investor fear is increasing or abating.

We see that the VIX’s move above its 50-day moving average between Aug. 19 and Oct. 2 coincided with — and arguably triggered — the decline in the S&P 500 during that period. Also note that the VIX’s subsequent decline back below the moving average — an indication of investor complacency — helped fuel the market’s rise into the Nov. 3 high.

Last week, the VIX edged above its moving average on Friday, currently situated at 19.15, to finish the week at 20.08. This suggests the market is leaning toward more weakness early this week. As long as the VIX remains above 19.15, the market’s decline is likely to continue.

Deflation Talk Heating Up Again

As I mentioned earlier, at least part of the reason U.S. stocks were under pressure last week was renewed global deflation fears, which are being fanned by the continued decline in commodity prices. 

The iPath Bloomberg Copper Sub Total Return ETN (NYSE: JJC) mirrors the price of copper, which has a wide array of industrial uses including building construction, electric products, transportation equipment, consumer products and industrial machinery. As a result, it is often seen as a barometer of global economic activity. The next chart warns global economic activity will slow further in the months ahead.

JJC is currently in the midst of a major downtrend, as defined by its 200-day moving average. This downtrend, which actually began in 2011, recently resumed following about two and a half months of sideways investor indecision between late August and early November.

The decline below the lower boundary of this indecision area indicates the larger bearish trend is resuming and targets a fall to $23.75, which is 5.5% below Friday’s close. This downside target will remain valid as long as the lower boundary of the pattern near $26.70 contains prices as resistance.

Putting It All Together 

Significantly better employment data, a strengthening housing sector and the recent rise in long-term interest rates collectively suggest an improving U.S. economic picture as we head into 2016. 

However, as I stated last week, a sustained rise above 5,133 in the market-leading Nasdaq Composite remains necessary to confirm the next sustainable intermediate-term stock market advance is under way.

Until then, the market remains vulnerable to more near-term weakness. Specifically, a decline below 2,021 support in the S&P 500 this week along with a rise above 19.15 in the VIX would clear the way for an extension of last week’s losses and a potential retest of the recent lows. 

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This article was originally published on ProfitableTrading.com: This Chart Offers A Clue To The Market’s Next Move​