Where are US stocks headed? Here are the key levels to watch

The rout in the U.S. stock market has brought the S&P 500 Index to a crucial inflection point, and chart watchers are scouring key technical thresholds for clues on whether the worst of the selloff is over. The U.S. equities benchmark is teetering on the cusp of a correction after falling 3% Monday, its biggest decline since September 2022, and just wrapped up its worst three-session run since June 2022. If the selling continues, there are few near-term levels to lure dip buyers, according to technical analysts, who monitor daily averages and other metrics to determine stock-market momentum. “Things are oversold enough to where stocks will likely rebound and rally soon, but the pain isn’t over just yet,” said Dan Wantrobski, technical strategist and associate director of research at Janney Montgomery Scott. “There’s a good deal to overcome technically before shooting back up to all-time highs.” [caption id="attachment_57144396" align="alignnone" width="1200"] (Courtesy/Bloomberg)[/caption] Wantrobski is monitoring stock market indicators like breadth and momentum. With the S&P 500 falling as low as 5,119.26 intraday on Monday, he sees a short-lived bounce following oversold conditions toward its 100-day moving average above 5,300. But the index could then resume declines in the coming weeks, heading close to its long-term 200-DMA around 5,000. It traded as much as 15% above its 200-DMA in late July — a historic extreme that has predicted previous selloffs. Traders who follow Fibonacci analysis are eyeballing 4,838 on the S&P 500, which represents a 38.2% retracement from its October 2022 lows to its July highs, according to Todd Sohn, managing director of ETF and technical strategy at Strategas Securities. [caption id="attachment_57144395" align="alignnone" width="1200"] (Courtesy/Bloomberg)[/caption] The Nasdaq 100 Index briefly slumped below its 200-DMA of 17,657 on Monday, the first time it has done that since March 2023. With the tech-heavy index closing at 17,895, investors are looking at the 200-DMA as a support level. The S&P 500 and the Nasdaq 100 also appear to be oversold based on their 14-day relative strength indexes — popular short-term momentum indicators that measure the magnitude price changes. Their RSIs are hovering around 30, which historically is an encouraging sign for near-term equity gains. Equities have been locked in a tight range for months, with the S&P 500 moving 1% or more in either direction during just 29 of 2024’s 149 trading sessions, Bloomberg data show. Prior to July 24, the index had gone 356 sessions without a 2% drop. [caption id="attachment_57144394" align="alignnone" width="1200"] (Courtesy/Bloomberg)[/caption] Market technicians also want to see broad moves rather than a handful of companies pushing major indexes higher. The Arms Index, also called the Short-Term Trading Index, or TRIN, is an indicator that compares the number of advancing and declining stocks to advancing and declining volume. Readings below 0.5 in the Arms Index suggest there is more demand for stocks, while readings above 2.0 are a sign that investors are selling. On Monday, it sat at 1.02, meaning more pain could be on tap before the final washout. [caption id="attachment_57144393" align="alignnone" width="904"] (Courtesy/Strategas Securities)[/caption] The percentage of New York Stock Exchange companies trading above their 50-DMA sits at 45% — it needs to get to at least 20% for traders to believe the selling is done, according to Strategas’s Sohn. But that may not happen in a straight line. For example, Mark Newton, head of technical strategy at Fundstrat Global Advisors, sees the S&P 500 close to bottoming soon, though it faces resistance around 5,329. Newton pointed out that the Japanese yen was one of key things that contributed to global market turmoil after the Bank of Japan raised interest rates on July 31. With the yen extending its rebound against the US dollar to over 10% from July’s low, the greenback has weakened toward 140 versus the yen — around its December lows — and a level of support could, in turn, help underpin stocks if most of the dollar’s pain is over for now, Newton explained. The Cboe Volatility Index, or the VIX, briefly rose to 65.73 on Monday, its highest intraday level since March 2020 when the COVID pandemic frenzy was just starting to take hold. Major moves in the VIX, which measures the 30-day implied volatility of the S&P 500, historically lead to strong equity returns — as long as the U.S. economy avoids a recession. “Anytime the VIX is in the top decile, it usually leads to a near-term bounce in stocks,” Sohn said. “Though when this has happened in the past, stocks tended to have another flush lower after a brief bounce, but with fewer stocks making new lows before the pain was over.”

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