Traders work on the floor of the New York Stock Exchange.
Stocks are in a turbulent period now, and technical analysts say it looks like a short-term pullback.
Strategists say it would make sense for this week’s sales to fit into the pattern of many pullbacks with a 3-5% drop.
But corporate earnings season could decide the fate of the sell-off, which carried the S&P 500 to Tuesday’s close of 4,134, a drop of 1.2% from Friday’s record highs.
“This is the rapid downward movement to relieve the overbought nature of the market,” said Scott Redler, strategic director of T3Live.com. It follows the short-term technical characteristics of the market. “A normal withdrawal can see 3,983-4,000 and still be healthy.”
Redler said the 50-day moving average at 3,985 was an intermediate support level since November, and the S&P 500 has not traded below for more than about a session since.
If the index goes below the 50-day moving average, it could be a sign of negative momentum.
“The past week has been frustrating.… The S&P was at an all time high as many growth stocks were battered,” Redler said.
He said that while it looks like the sale will be shallow, it is still not clear that it will be.
Strategists said 4,000 could support the S&P 500.
“It’s a refreshing break,” said Ari Wald, head of technical analysis at Oppenheimer.
“It does not change our longer term outlook that the bull market is still intact. It is continued consolidation after the S&P 500 has surged,” he added.
Redler said the sale of high-growth names, including special purpose acquisition companies and clean energy stocks, and the volatility of cryptocurrencies were seen as potential warnings of a wider decline. market – but that remains to be seen.
“If that were to be the case, this would really be how the FAANG names, which have been strong for the past two weeks, pay off over the next few days,” Redler said.
The first of the FAANG companies to report was Netflix, which released its results after Tuesday’s close. The title plunged after reporting 3.98 million new subscribers, well below the expected 6.4 million.
Other FAANG names – Alphabet, Amazon and Facebook – report next week.
“The next three or four days here will decide whether we move to S&P 4,000, which will only test the previous breakout,” Redler said. He said Netflix could weigh in on high-growth tech.
The market liquidation matches the expected seasonal pattern for April trading, where the S&P 500 is typically higher, but the first half of the month is the strongest time. The index is up about 4% for the month so far.
“It was suddenly overbought,” said Quincy Krosby, chief markets strategist at Prudential Financial. “It’s healthy to see the massive sell. Obviously you are always worried about a deeper sell, but you probably aren’t.”
She said it’s a change of tone when the buyers don’t come in right away and buy the drop.
“The point is, we have an overbought market that goes into liquidation when we look at some of the metrics we use,” Krosby said. “Then you started to have concerns about the recovery. You have concerns about Covid. You have concerns about vaccines. “
Some of the defensive sectors have outperformed recently. Utilities are up 0.8% in the last two sessions and over 9% in the last month. Real estate investment trusts have been the best performers of the week so far, up 1.5%.
Consumer discretionary, financials and energy are all down more than 2% since the start of the week.
Krosby said she was concerned about the outperformance of defensive utilities, but found that the utilities that will benefit from the infrastructure spending are the ones with the higher prices.