Goodbye, summer bounce.
The S&P 500 ended Friday below a crucial chart support level that has served as a battleground for the past few years, leading technical analysts to warn of a potential test of the stock market’s June lows.
“Over the past three years, the level on the [S&P 500] with the largest volume traded was 3,900. It closed below that on Friday for the first time since July 18, which we believe opens the door for June lows” near 3,640, said Jonathan Krinsky, chief market technician at BTIG, in a Sunday note (see chart below).
The S&P 500 SPX
finished friday at 3,873.33 – down 0.7% for the session and 4.8% for the week for its lowest close since July 18. That left the index up 5.7% from its June 16 closing low of 3,666.77. The S&P 500 hit an intraday low for selling at 3,636.87 on June 17, according to FactSet.
The Dow Jones Industrial Average DJIA
fell 4.1% last week to end Friday at 30,822.42, while the Nasdaq Composite COMP
saw a weekly decline of 5.5% to 11,448.40. Futures on stock market indices ES00
were trading flat to a bit late on Sunday.
A return to June lows is unlikely to be a straight line, Krinsky wrote, but the lack of noticeable “panic” so far in the Cboe VIX volatility index
the futures curve and lack of a decline to more extreme oversold conditions, as measured by the monthly Relative Strength Index, does not bode well, he said.
Other analysts noted the lack of a bigger rise in the VIX spot, often referred to as Wall Street’s “fear gauge.” The options-based VIX ended Friday at 10:30 p.m. after trading as high as 28.42, above its long-term average near 20 but well below the panic levels often seen near market lows. above 40.
Stocks had rebounded strongly from lows in June, which saw the S&P 500 down 23.6% from its January 3 high at 4,796.56. Krinsky and other chart watchers rated the S&P 500 in August completed a more than 50% retracement of its fall from the January high to the June low – a move that in the past had not been followed by a new low.
Krinsky at the time, however, cautioned against continuing the rebound, writing on August 11 that “the tactical risk/reward looks poor to us here.”
Michael Kramer, founder of Mott Capital Management, had warned in a note last week that a close below 3,900 would set up a test of support at 3,835, “where is the next big gap to close in the market.”
Shares fell sharply last week after a Tuesday reading of the August consumer price index showed inflation warmer than expected. The data cemented expectations that the Federal Reserve is offering another 75 basis points, or 0.75 percentage point, hike in the federal funds rate, with some traders and analysts penciling ina increase of 100 basis points when policymakers wrap up a two-day meeting on Wednesday.
The market’s rebound from its June lows came as some investors grew more confident in a Goldilocks scenario in which Fed policy tightening would wipe out inflation in a relatively short time. For the bulls, the hope was that the Fed would be able to “pivot” away from rate hikes, thus avoiding a recession.
Stubborn inflation readings left investors raising their expectations of where they thought rates would top, heightening fears of a recession or a sharp downturn. Aggressive tightening by other major central banks fueled fears of a broad-based global slowdown.
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