(Bloomberg) - The S&P 500 (^GSPC) Index has clocked four consecutive weeks of declines and it’s on track for the worst month in a year.
To get a sense of where the pain may end, many equity traders look to a type of technical analysis credited with identifying the bottoms of big market declines, including two major routs since 2020. The bad news for bulls: It signals a long way down before the index finds major support.
It’s known as the 50% Fibonacci retracement level, a tool that chart watchers use to find potential entry points based on an 800-year-old mathematical principle. In this case, it represents a decline that would erase half of the S&P 500’s gains from last April’s low to its most recent record in January. It sits at 5,980 — or some 9% below Wednesday’s close.
“When you get a clear change in trend, there’s just certain levels that investors look at to kind of come back in, especially shorter-term traders,” said Matt Maley, chief market strategist at Miller Tabak + Co. “And that 50% retracement is one that people follow very closely.”
Technical analysis is just one tool to gauge stock-market trends and potential inflection points, and it’s far from a magic crystal ball. The S&P 500 briefly fell below 6,500 last week and it’s trading below its 200-day moving average, a trend line many hoped would act as support to halt the decline. Its failure to do so has pushed technical analysts to search for other potential levels where the bottom may be.
“It’s easy to see from a technical perspective that the worst isn’t over yet,” said Doug Peta, US investment strategist at BCA Research. “Until the Strait of Hormuz is open and crude oil, LNG, refined products and derivatives are moving through it at a normalized rate, there’s likely to be upward pressure on inflation and downward pressure on global growth.”
Should the S&P 500 extend losses this week, it would likely move toward 6,200, Maley said in a recent note to clients. The next potential support after that would come in at 5,980, which marks not only the 50% Fibonacci retracement but also the gauge’s mid-June low.
The Fibonacci sequence, which was named after Italian mathematician Leonardo Pisano, known as Fibonacci, came in handy during the market turmoil trigged by President Donald Trump’s so-called Liberation Day tariff announcements last year. The S&P 500 found support at 4,982.77, a level that corresponded with the midpoint of a rally spanning three years from 2022.
Similarly, the 2022 bear market found its trough near the 50% retracement of the rally between March 2020 and early January 2022.
To Jonathan Krinsky, chief market technician at BTIG LLC, signs of stock-market weakness were present well before the conflict in the Middle East erupted. Issues with software and private credit had already taken their toll. In terms of how effective the 50% retracement level is when calling a bottom, Krinsky explains that it’s just “one piece of the puzzle.” Maley agrees, noting that there needs to be other influences on the market in order for it to be effective.
A resolution to the war in Iran and an end to the ensuing spike in energy prices would be one obvious catalyst to help the market rebound. Stocks rallied on Wednesday as traders weighed the viability of US-Iran ceasefire talks, with the S&P 500 closing up 0.5%.
Still, uncertainty about the longer-term trajectory of US stocks remains.
“The war and what’s happening in it is a specific issue,” said Kim Forrest, chief investment officer at Bokeh Capital Partners. “What is the Fed going to do about interest rates given all the extremely changeable views people have on markets? And then there’s the price of oil, which fluctuates wildly. Pick your topic and you can own it.”
By Joel Leon
