The August sell-off has stocks testing some key technical levels, spurring investors to watch where equities will go next. The Dow Jones Industrial Average and S & P 500 broke below their 50-day moving averages last week , a sign that the technical backdrop for stocks has worsened since the start of August. This month is already a historically weak season for markets, but investors are also contending with higher bond yields, weak economic data out of China and the likelihood of higher interest rates for longer. Now, investors are watching to see where the S & P 500 goes next. Specifically, if the S & P 500 manages to keep above the key support level of 4,200, they expect the broader index can shake off any challenges and take the next leg up in a bull market rally. “I think that we could go to 4,200 and I think that we will stop at 4,200,” said Sam Stovall, chief investment strategist at CFRA. .SPX 1Y mountain S & P 500 1-year The strategist said this level is a key support as it’s a convergence of several trends in the market. Firstly, he noted it’s a Fibonacci retracement level based on the move seen from the October 2022 lows to last month’s highs. These levels are used by stock technicians to identify levels of support and resistance. It would also be a a roughly 4% decline for the broader index from Friday’s close. Secondly, the 4,200 level represents a prior area of resistance back in February when stocks dropped after being on the upswing. The S & P 500 fell to roughly 3,800 in March before resuming its march upward. “Old resistance becomes new support, or vice versa if we’re in a downtrend,” Stovall said. “That’s why that 4,200 level is important. If we can hold at 4,200, then what was resistance back in February becomes support today.” Thirdly, the level is close to the S & P 500’s 200-day moving average of 4,132, and close to the upward trending line. For Stovall, a break below the 4,200 level could mean “things could get really bad” as stocks could be in for a more severe decline after their rally this year. However, the strategist is optimistic that stocks can hold support, and actually rally through year-end. “We are in the early phases of a new bull market that started on October 12,” Stovall said. “We advanced quite swiftly and are now going through a much needed digestion of gains. A combination of technical factors imply that the S & P may test the 4,200 level but might not break significantly below that.” To be sure, not everybody agrees that the S & P 500 can pull through, saying that the recent weakness in stocks signals more trouble for U.S. equities ahead. BTIG’s Jonathan Krinsky said 4,200 could provide “meaningful support” for the S & P 500 and represent a logical spot for a bounce. However, he suspects any move higher will face pressure. “Medium term … we see further downside as weekly momentum remains negative and there is little in the way of meaningful support until ~4200 for the SPX and 318-320 for the [Nasdaq-100]. That would represent ~8.75% (SPX) and ~17% (QQQ) drawdowns off their recent highs, yet leave them above their rising 200 DMAs. In other words, we think we’re about halfway through this correction which is a logical spot for some consolidation,” Krinsky wrote Sunday. “As far as the magnitude of a bounce, the SPX’s 50 DMA is at 4453 and a 50% retracement of the recent pullback would be 4471. We suspect somewhere in that zone is where any bounce should start to stall,” he added. Meanwhile, Oppenheimer’s Ari Wald said over the weekend that he is watching 4,300 as an “attractive support” next for the S & P 500, followed by 4,200. Wald added that, “long-term positives lead us to believe a period of seasonal weakness should prove an opportunity to buy into an ongoing market advance.” — CNBC’s Michael Bloom contributed reporting.
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