Fairlead Strategies’ Katie Stockton has warned that the S&P 500 is teetering on the edge of a significant technical breakdown. Stockton emphasized the importance of preserving the support level at 4,180 to prevent further selling.
Extreme readings in market sentiment have raised concerns about an impending reversal in stock prices. However, Stockton advises against selling into the current weakness, as signs of intraday downside exhaustion indicate a potential rebound, possibly maintaining support or offering a better opportunity to sell.
While technical analysts closely watch the 4,200 level, Stockton’s support range for the S&P 500 extends from 4,180 to 4,195. She emphasizes that these support levels should be viewed as cushions rather than precise points, given the involvement of numerous market participants.
A decisive breakdown below 4,180, typically indicated by two consecutive weekly closes below that level, would signal an extended risk-off environment in the stock market, potentially driving prices lower. Should the 4,180 support falter, Stockton identifies 3,920 as the next critical support level, indicating a potential 6% downside from current levels.
While the S&P 500 briefly traded below 4,180 on Thursday, dropping to as low as 4,151, Stockton anticipates a possible reversal in stock prices in the near term. She highlights the presence of oversold extremes not only in price but also in market breadth, such as the percentage of stocks above their 50-day moving averages.
Around 17% of S&P 500 stocks currently trade above their 50-day moving average, a level that has historically been associated with market correction bottoms. However, Stockton points out that the missing ingredient for a stock market recovery is a consolidation in interest rates. A halt in rising interest rates could signal a positive turn in stock prices.
The elevated VIX level reflects market fear, suggesting that a potential reversal may be swift. Stockton believes that a consolidation in yields is necessary to shift sentiment. Her indicators hint at the possibility of yields entering a prolonged consolidation phase. The 10-year US Treasury yield dropped six basis points to 4.89% on Thursday but has consistently tested the 5% level over the past week. A jump in the 10-year yield above 5.04% would reinforce Stockton’s concerns of continued weakness in stock prices.
