For months we’ve warned investors that the economy remains shaky and the financial markets still carry high levels of risk. With this week’s market pullback and the significant economic troubles confronting Europe, this would be a great time to say “I told you so.”

It would also be premature.

There is no disputing that the economic challenges facing Greece, Portugal and other European nations at this time could have serious worldwide repercussions. One of those could be a new, global recession.

But so far, the damage to U.S. investment markets is not severe enough to pronounce an end to the rally that began in March 2009.

The accompanying chart provides a clear image of the technical situation. The top portion of the chart shows daily price movements of the S&P 500 over the past two years. The gold line is a 50-Day Simple Moving Average (MA). The blue line is a 200-day MA. The S&P 500 has broken slightly below its 50-day MA. Since the current rally began in March 2009, this index has on three prior instances fallen below its 50-day MA. Each time it recovered and resumed its upward trend.

If it falls below its 200-day MA, that would be a clear signal that the advance has failed and a more serious bear market correction could persist.

Immediately below the top portion of the chart is a moving average convergence divergence (MACD) tool. While the MACD is falling, it has not yet gone negative and it is near a level where a rebound is a possibility.

The next portion of the chart is a stochastic oscillator. This tool is at an oversold level that would normally indicate a rebound is likely.

Finally, the bottom portion of the chart is a relative strength index (RSI). This indicator has dropped below 50, meaning that momentum for the S&P 500 is now below the level needed to sustain an advance. But it has not yet fallen to the low it reached in February 2010 and it is certainly not yet trending below that 50 mark, which is what we would expect in a new bear market.

The current situation could continue to deteriorate and in a week or two, if these indicators could all show a much more negative picture. But for now we must rely on the image we have—that of a market at risk but one where it is too early to declare that the tide has turned.
F.S.