The carnage on Wall Street continued last week. Stocks finished sharply lower, led by the small-cap Russell 2000, which lost 3.7% to end Friday down 11.3% for the year. Of the major indices, the S&P 500 shows the smallest year-to-date loss, off 8%.

While there are a few reasons to believe the market may be approaching a meaningful bottom, I unfortunately do not see any tangible evidence suggesting one is in place. Until that happens, I will remain on the defensive.

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From a sector standpoint, last week’s market weakness was led by materials, which lost 4.5% compared to the S&P 500’s 2.2% decline. 

The only sector of the S&P 500 to finish in positive territory for the week was defensive utilities, which gained 0.7%. As I’ve mentioned, the recent decline in long-term interest rates — which has been driven by a strong shift in investor assets back into the relative safety of U.S. Treasuries — has drawn yield-seeking investors back into riskier but better paying utilities.

Retail Remains Vulnerable

In last week’s Market Outlook, I said my work targeted a drop in the SPDR S&P Retail ETF (NYSE: XRT) to $40, and that its positive correlation to the S&P 500 warned of more weakness in the broader market.  

The fund closed Friday below $40, which equates to a 7% decline from XRT’s initial November breakdown following almost three months of sideways investor indecision.

Although my initial downside target has been met, the chart shows the sharp decline has clearly broken the November 2008 uptrend line. This suggests a sustainable peak is in place at the March 2015 high and, minor corrective rallies aside, clears the way for even more weakness in the weeks and potentially months ahead. 

As goes XRT, so is likely to go the broader market.

Transports Confirm Breakdown In Industrials

Last week, I also discussed the Dow Jones Industrial Average’s breakdown below its March 2009 uptrend. I warned that major breakdowns like this tend to have a domino effect with other key indices.  

One of this week’s “dominoes” is the Dow industrials’ cousin, the Dow Jones Transportation Average. It also collapsed below its March 2009 uptrend line last week.

This trendline, currently situated at 6,980, now becomes important overhead resistance. Until broken, it warns of the transports’ vulnerability to an even deeper decline in the weeks and months ahead.

Two more “dominoes” also fell over last week: The PHLX Housing Sector Index (HGX) and Norfolk Southern (NYSE: NSC), both of which I covered in the Jan. 4 Market Outlook, saying they were potential coincident or leading indicators of a broader market decline.

How Much More Pain Is In Store?

Now that we know major breakdowns in a number of key indices and individual stocks warn of a bigger correction, the next task is to try to quantify how much more pain may be in store. One way to do this is by identifying key underlying support levels in the benchmark S&P 500.

The index finished last week at 1,880, just 0.7% above its 1,867 August low after trading slightly below it on an intraday basis on Friday. 

If 1,867 is meaningfully broken (i.e., by more than just a few points) this week, especially on a closing basis, it will clear the way for a drop to the next support level — the October 2014 low at 1,821. This is 3.2% below Friday’s close and would represent a nearly 15% decline from the May 2015 all-time high.

The next support level, which is even more important, is 1,738. This represents the February 2014 low and the 2009 uptrend line and is 19% off the index’s high.

Treasuries Offer A Port In The Storm

One indirect result of this month’s stock market collapse has been a frantic move back into the relative safety of U.S. government securities. This drove the yield of the 10-year Treasury note (which moves inversely to prices) down to 2.03% on Friday from a recent high of 2.32%, made on Dec. 29.

As the chart shows, last week’s decline pushed yields below the January 2015 uptrend line at 2.10%. This clears the way for a drop to 2.00% to retest the August and October closing low yields. 

My intermediate-term outlook continues to suggest the likelihood of significantly higher yields later this year, potentially as high as 2.82%. But for the time being, as long as the stock market remains weak, the recent decline in long-term interest rates is likely to continue.

Putting It All Together

A number of long-term uptrends have been broken in key U.S. indices, economically influential market sectors and important individual stocks. These breakdowns collectively warn of the market’s vulnerability to an even deeper decline. Based on support levels, we may see the S&P 500 fall as much as 19% from its all-time high. 

Therefore, until I see some clear evidence of a meaningful market bottom, I remain on the defensive. Long-dated U.S. Treasuries and utilities are potential ports in the storm as the market works its way through this long-overdue corrective phase.

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This article was originally published on ProfitableTrading.com: Major Breakdowns Signal More Pain Ahead