Thud. Investors returned from a three-day break on Tuesday in a pessimistic mood, as the S&P 500 saw its biggest drop of the year.
The latest slide on Wall Street has left the stock market at “important support” but one which should provide a “reversal back higher,” according to a closely watched research boutique.
In a note to clients published late Tuesday, Fundstrat’s head of technical strategy Mark Newton said technical factors and the end of a rally in bond yields should help stocks recover ground in the short term.
“The near-term decline in [the S&P 500] has now closed in on important support, which should likely provide a possible low to this pullback sometime over the final three days of this short week,” Newton wrote.
He noted the low volume during Tuesday’s slide, which suggested the desire to dump stocks was limited. The S&P 500 remains up 4.1% in 2023.
“Despite SPX having logged the worst trading day performance-wise in over two months’ time, volume was sub-par. While many blame the shortened holiday week for this lack of volume spike, one would think that volume would be at least a bit more than average on the worst trading day of the year,” said Newton.
Other technical factors may also provide assistance to equity bulls.
“[P]rices are now hovering right above the all-important 50% retracement area of the prior low to high range. Additionally, this week represents a 50% time retracement of the prior low to high swing from late December 2022,” he said.
“Thus, some short-term price and time confluence is approaching,” Newton wrote.
Given that the market continues to be led by moves in government bond markets — reflecting expectations of Federal Reserve monetary policy trajectory — any retracement in yields will also underpin stocks, he said.
“Treasuries look to have sold off in a near-perfect 5-wave decline from 1/19/23, which means that this bounce in yields also should be nearing completion.”
However, Newton accepted that further declines will make stocks even more vulnerable.
“Only if SPX undercuts 3945 would I fear that a larger decline might be in store. (For those that wish to give this rally a bit more slack, 3900 should also be important.) Such a move would involve slicing back under the 200-day moving average in SPX as well as undercutting the 61.8% retracement zone of the prior low to high range. Finally, this would also involve breaking the larger uptrend from last October’s lows.”
The Chart Report’s Patrick Dunuwila made a similar point about what would happen if stocks fell further. He described Tuesday’s action as a classic “failed breakout.”
“As we know, failed breakouts are often followed by sharp moves lower. If you’re feeling a sense of déjà vu, it’s because most of the major declines over the past year started off this way,” said Dunuwila. Traders will now watch to see if the S&P 500 can hold at 3,900 – 3,950, as a break below that “would likely bring more bears out of hibernation,” he says.
Stock futures are struggling after the Dow’s nearly 700-point plunge, while the 2-year Treasury yield is lower, but still hovering near the highest level since 2007. Oil prices are pulling back.
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The minutes of the Fed’s most recent policy meeting may shed light on where central bank officials stand on more aggressive rate hikes. New York Fed President John Williams is due to speak at 5:30 p.m., after markets have closed.
TJX and Overstock will report results, while Nvidia (preview here), eBay and Etsy results are coming after the market close.
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McKinsey & Co., the management consulting firm known for recommending layoffs to other troubled companies, reportedly plans to cut 2,000 jobs of its own.
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