A selloff for the major stock indexes on Tuesday left many investors wondering, “How low can it go?”
Technical analysts following the S&P 500 have a short answer: between 1000 and 1009. That's the lowest support level the broad index can hit without debunking the idea that stocks are recovering.
"It’s a level where you would expect to see the bulls put up a pretty good fight," says Christopher Verrone, a technical analyst at Strategas Research Partners. That's because it falls within the limits of a Fibonacci retracement, a technical term that refers to numerical patterns that are often found in the stock market. If traders drive the market near that low point, technical analysts say others will interpret the declines as a sign that it's time to buy.
The S&P 500 hit an intraday low of 1035 Tuesday, the fourth time this year that the benchmark index has tested what traders call a support level, a critical pivot point for the index. That point is now 1041, the index’s lowest close of the year, on May 25.
Analysts say Tuesday’s 33-point decline in the S&P 500 is less alarming when put into context. Although it’s a big drop for a single session, the index now stands only 6% below 1112, its average over the past 200 days, another key measurement for the chart checkers.
Support for the Dow Jones Industrial Average now stands at around 9800, and at 2140 for the Nasdaq. The Dow was tested in February and again on June 7, and the Nasdaq support level was breached Tuesday and twice in February.
Richard Ross, a technical analyst at Auerbach Grayson, says market momentum is often driven by psychological factors. During Tuesday's test of the S&P 500, a disappointing reading of the consumer confidence index and new worries over Chinese growth compounded ongoing worries about European deficits.
However, a look at the numbers over time suggests a rise is more likely than more losses, Ross says. "Patterns of human behavior have shown a proclivity to repeat themselves time and again," he says. "There's no better gauge of human emotion than a stock chart. It's a visual representation of what people are thinking and feeling."
In highly emotional times, Ross says the market is driven as much by the tug of war between greed and fear, support and resistance and supply and demand as by fundamentals, so patterns tend to emerge.
For example, the second year of a presidential administration has historically included a down time for stocks, says John Kovolos, an analyst at Concept Capital. "The summer months during the second year of a presidential cycle tend to be very weak," he adds. "The election period tends to present a good buying opportunity, and now we may be seeing a shift in power in Congress."
Markets tend to do better when power isn't concentrated in one particular party, he says.
Still, many analysts say this is a tricky time for predictions. The broader economic recovery is slowing, and even robust second quarter earnings may not provide much of a spark, they say.
"With this type of volatility the fundamentals are out the window," Ross says. "Fundamentals didn't change overnight, but Tuesday stocks went down 3%. It's purely emotion."
That's where technical analysis comes in handy, he says. "We stopped at 1040, and it's bounced all four times that's happened."
That doesn’t mean the markets are in for much more than a so-called relief rally, where major indexes wouldn't move too much above their 200-day moving averages, but in uncertain times, with volatile days marked by big swings, that may be the best hope.
"In trending markets, it's easier to make money," Ross says. "You can see the trend, ride it, and everybody's happy. Sideways markets are fraught with frustrations."
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