There’s no question 2016 has gotten off to a rough start for equity markets around the world. The S&P 500 logged its worst opening week of the year in history earlier this month and has continued its fall through the first three weeks of the year.
The S&P 500 is now down more than 14.1 percent from its all-time high back in May of last year, but pullbacks aren’t necessarily a bad thing in a healthy bull market. However, last week the argument that the market’s current pullback is not of the healthy variety gained some major momentum from a technical analysis standpoint.
Last week, the S&P 500 fell below the 1867 level that served as a double bottom during the pullback in the second half of 2015. That means that, even if the S&P 500 bounces in coming weeks, it has already established a lower low in its chart.
A look at a longer-term chart of the S&P 500’s spectacular bull market rally in recent years shows plenty of major pullbacks, including downturns in February 2014 (-6.1%), October 2014 (-9.8%), August 2015 (-12.5%) and the current pullback from November highs (-13.3%).
However, after years of establishing a series of higher highs and higher lows, a hallmark of a bullish market, the November peak was the first high that fell short of the previous peak in May of 2015. With last week’s breakdown below August’s 1867 low, the S&P 500 has logged its first lower low as well.
Where can the market look for technical support at this point? Unfortunately, the bull market has been so neat that there aren’t many resistance levels that have faced tests against the kind of powerful downward momentum that the market seems to have these days. Until the S&P 500 makes it back above 2116, the bull market appears to have ended. Whether that means that the S&P is headed for a massive drop or will simply find a trading range for consolidation is anyone’s guess.
In the short-term, the market’s bounce near the 1820 low from October of 2014 is good news for those hoping for a trading range rather than the beginning of a bear market. However, realistically, a close or breakdown significantly below 1820 would be an indication that things will likely get much worse. A look at a long-term chart of the S&P 500 shows that the S&P has very little support above the 1550-1575 level that served as the market tops prior to the Dot Com Bubble and the Financial Crisis.
Traders should be closely watching for any sustained move below the 1820 level for the S&P 500 as an indication that shorting S&P 500 index funds, such as the SPDR S&P 500 ETF Trust (NYSE: SPY), could be a very profitable trade in the next year or two.
Disclosure: the author has no position in the stocks mentioned.
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