Was Monday’s selloff indicative of the big stock market correction that Wall Street has been calling for? Analysts are watching a key level for clues.
The S&P 500 had its worst day in months Monday, tumbling 1.7% on fears that property giant
China Evergrande Group
‘s (ticker: 3333.Hong Kong) troubles may spill over into other markets. Investors are also growing uncertain as the Federal Reserve’s meeting nears and negotiations over the Congressional budget and debt ceiling continue.
Friday, the S&P 500 fell below its 50-day moving average, a technical indicator that shows investors are losing confidence in the market outlook. The S&P 500 is 3.9% below its all-time high as of Monday’s close, at its lowest level since mid-June.
But on Monday, the S&P flashed another troublesome signal. The index briefly fell below its 100-day moving average of 4,320.
Now, the question is whether stocks will bounce back quickly or suffer a correction, defined as a 10% drop from a recent high. Frank Cappelleri, chief market technician at Instinet, is watching the 100-day moving average. As the market has fallen below these key levels, “You haven’t had the demand to buy [the] volatility,” he said.
If the S&P 500 falls significantly below the 4230 level with a majority of the stocks on the index in the red, watch out for a correction. That would indicate that market participants still see large risks that aren’t reflected in stock prices.
“Is it going to be a falling knife at that level? 1-2% down moves?” Cappelleri said. “[The] chances of an elongated volatility environment are higher.”
On the other hand, the S&P 500 could be in for a quick pullback if it sees a move higher, a tiny move lower, or a drop where the majority of stocks on the index are rising. Any of those scenarios would signal optimism.
“[The 4,320 level] can encourage some dip buying because the market has been so consistent this year,” said Cappelleri.
Other analysts are watching, too. “We are placing a lot of weight on today’s price action,” wrote founder of Fairlead Strategies Katie Stockton, on Monday.
Some good news for investors: The index closed Monday above that key level.
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