S&P 500 breaks down at 50-day moving average as market technicals deteriorate

Key trading levels and signals to watch in US indices

The S&P 500 faces a challenging technical backdrop as we head towards two key risk events: Nvidia’s Q3 earnings (Wed) and the delayed September nonfarm payrolls (Thu). Against a backdrop of concerns about AI valuations and the quality of earnings in the sector, as well as mounting worries about whether the Fed will cut next month, the market’s reflex has been to pull back from all-time highs following a monster rally since the April lows. 

The move is not isolated to stocks – crypto markets are under a lot of pressure, with Bitcoin down around 28% from its October peak. There are concerns about liquidity amid signs of stress in money markets, however bulls remain hopeful of a year-end rally driven by favourable flows the reopening of the US government injecting fresh liquidity and a potential stimulus package in Japan.

Nevertheless, the technical outlook on the S&P 500 is challenging for bulls. Yesterday the broad market declined 0.92% to 6,672, crucially closing below its 50-day simple moving average for the first time in 139 sessions. A move below the 50-DMA does not indicate itself a bear market is coming, but it underscores near-term loss of momentum, rising implied volatility and potential for a deeper pullback.

A correction could well be underway already. Internals look challenging too with market breadth weak - inthe Nasdaq Composite 3,300 names are at 52-week lows. AI stocks in the GS US TMT AI Basket are already close to correction, down to around 307 from a high of 335 in October.Nevertheless, while we may be in the midst of a correction the rotation out of big tech and into areas like healthcare and utilities may be removing some of the froth from the market.

Looking at the charts, the S&P 500 slipped out of the channel, closed below its 50-day simple moving average and futures are taking down the 61.8% retracement of the rally post 10 October around 6,650 but bulls have mounted a defence of this level and we look to see if this holds or not today. 6,600 is the next level to the downside, the 76.4% retracement of the rally since 10 Oct.

I noted last week the failure to close above 6,750 was a signal of weakness and though we saw some move to the upside yesterday once again saw this level act as resistance with a with a pretty lacklustre attempt to rally through this failing. 

Lee Coppersmith at GS noted that a move below 6,725 was likely to see trend-following quant funds known as CTAs flip from buyers into sellers, according to Bloomberg.

Friday’s low on the cash session sits at 6,631, after which we look to around the 6,500 to 6,550 area, which has been tested and held several times, notably on October 10th where it chimed with the 50-day SMA at the time. The 6,430 area is next in line as the 23.6% Fibonacci retracement of the rally off the April lows, matching the July swing high. Then 6,125, the Feb peaks, is the 38.2% level.

Chart1: S&P 500 key levels