- The US stock market continued selling off in earnest on Monday, with all major indexes dropping more than 1.9%.
- The S&P 500 closed below one of the market’s most closely-watched technical levels, and historical precedent suggests the breach could lead to further selling.
It hasn’t exactly been a smooth ride for US stocks in recent months. But no matter how turbulent conditions have gotten, market bulls have been able to find solace in the form of a key technical level on the S&P 500.
That would be the benchmark’s 200-day moving average (DMA), which has repeatedly served as resistance to the downside. That’s included a handful of occasions when the index fell below the threshold on an intraday basis, only to bounce back above it before the close.
However, following the market bloodbath that transpired on Monday, the S&P 500 is now below its 200-DMA for the first time in 20 months.
Now that the S&P 500 is stuck below its 200-DMA, it could unleash more selling pressure upon the market as technically-inclined traders take their cue. After all, with the psychological barrier it once provided now removed, it’s possible investors will unabashedly shed exposure.
JPMorgan technical strategist Jason Hunter has been keeping an eye on the S&P 500, and he sees the index’s next test at the 2,541-2,557 range that marks its October-November 2017 lows. He made that call last week, when the S&P 500 closed below 2,610, a separate technical level he’d established. Now that the selling has worsened considerably, it’s possible his near-term outlook is even more bearish.
With all of that in mind, this analysis does come with one major caveat. In June 2016, the last time the S&P 500 closed below the 200-DMA, the index brushed off the technical breach, rallying more than 8% over the following month.
In the end, technical analysis is just part of the grand investment puzzle. And while a breach like the one seen Monday isn’t the end of the world, it should certainly grab traders’ attention as they plot their next move.
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