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Stock Market Gets More Manic as Fiscal Cliff Fears Escalate

Stocks are breaking key technical levels, a possible sign of more selling, as anxiety builds about Washington's handling of the 'fiscal cliff.'

"If you measure the condition of the market, the conditions keep showing faulty signs," said Scott Redler, who follows the market's short-term technical signs for T3Live.com.

The S&P 500 late in Thursday's session fell below its 200-day moving average, around 1381, for the first time since a two-day period in June. The Dow and Nasdaq also broke through their 200-day averages this week, and the whole market is following Apple's lead, said Redler.

"The last line of defense was the 200-day and Apple broke that at 587 and hovered below it for two days, and today it closed 40 points lower," said Redler. "I'm looking for a reversal pattern every day, but every day, it's still heavy and we haven't seen it." He said there is a key support level at 525/530.

(Read More: Markets Face Fiscal Cliff and Fiscal Stalemate)

"What the bears want is the market to open down, close on the lows and hover below (the 200-day) for the next day or so and then continue with its very bearish action," Redler said. That did not happen in June, when the break beneath the 200-day put in the year's lows, before the market reversed and moved higher into September.

Wedbush Securities' Steve Massocca was watching the 200-day on the S&P Thursday afternoon. "If we break it, it could be dangerous. The lifesaver for buoyancy is the fact that short interest rates are next to nothing, and there's no chance they're going up," he said, shortly before the S&P plunged below 1380.

The Dow fell 121 to 12,811, and the S&P 500 ended Thursday at 1377, down 17. The Nasdaq was off 41 at 2895. Stocks had tried to rally early, as bonds sold off , but markets reversed course and the 10-year yield was at 1.61 percent late in the day.

(Read More: On Wall Street, Time to Mend Fences With Obama )

"My view is the election is a disappointment to the market. Earnings news has been disappointing to the market. There are concerns about how the fiscal cliff will get resolved. There's concerns about Europe. You've got (ECB President Mario) Draghi saying the German economy is being dragged down. You've got what looks to be a very fragile coalition in Greece passing this austerity package," said Massocca.

"I think there's a dispirited American investor. I think there were expectations and hopes," he said. Stocks had rallied Tuesday, ahead of the election outcome, on hopes that Wall Street's preferred candidate, Mitt Romney, could win, but since it became clear President Barack Obama won, the market has sold off. Traders turned immediately to concerns about the 'fiscal cliff,' and higher taxes on such things as capital gains and dividends.

"We are controlled by Washington's rhetoric now," said Redler.

President Obama speaks at 1 p.m. ET Friday and he is expected to ask Congress to take steps to help the economy and reduce the deficit. Both Sen. Majority Leader Harry Read, D-Nev. and House Speaker John Boehner, R-Ohio, have indicated a willingness to compromise in remarks made after the election.

Standard and Poor's, which downgraded the U.S. triple A credit rating in 2011, said Thursday it sees an increasing chance – now 15 percent - that the U.S. will go over the 'fiscal cliff.' The rating agency, however, said it sees the most likely scenario being that policy makers compromise in time to avoid most of the 'cliff' effects.

The Congressional Budget Office Thursday issued an update on the fiscal cliff impacts, from the expiring of certain tax cuts and the automatic spending cuts that came with the debt ceiling settlement in 2011. The CBO repeated its view that there will be a recession in 2013 if all fiscal tightening occurs, meaning Congress does nothing by year end to stop the $607 billion in spending cuts and tax hikes from hitting the economy. In that scenario, GDP growth for 2013 would be negative 0.5 percent, but after a decline in the first half, there could be modest growth later in the year, the CBO said.

(Read More: Why US Economy May Be Headed for Another Recession)

The CBO said that contraction would also take the unemployment rate to 9.1 percent by the end of the year. The CBO also provided projections for what it expects would happen if only some of the tax hikes are allowed to kick in or the sequestered spending cuts of more than $100 billion are eliminated. For instance, if Bush tax cuts are extended, the Alternative Minimum Tax is not expanded to more Americans, and automatic spending cuts are stopped, then GDP would grow by 1.75 percent, CBO said.

One of the crucial differences between Democrats and Republicans is that President Obama wants to raise taxes on the wealthy, while GOP lawmakers oppose returning to higher tax rates. J.P. Morgan economist Michael Feroli said that has led some pundits to suggest common ground for compromise could be found in the elimination of some deductions for the wealthy, rather than higher tax rates. But that would not be a significant amount of revenue, he said.

(Read More: Can Obama Create Main Street Jobs in 2nd Term?)

"If you can solve the upper income stuff, then you can probably resolve the rest of it or most of it," Feroli said. Some economists believe if Congress begins to squabble contentiously, as it did over the debt ceiling, that could take a toll on the economy. Heading over the cliff would as well. "The stock market is telling you it is troubled about the prospect," he said.

What Else to Watch

Friday's economic reports include import prices at 8:30 a.m. ET; consumer sentiment at 9:55 a.m., and wholesale trade at 10 a.m.

Earnings are expected Friday from JC Penney, Allianz, Brookfield Asset Management, Covidien and Warner Chilcott.

Earnings to Watch

Symbol
Name
Price
 
Change
%Change
Volume
JCP
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ALV
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BAM.A
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COV
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WCRX
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Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.