Market Insider

Watch this S&P 500 level for correction signal

Stock correction? This technical level may be key
Stock correction? This technical level may be key

After September losses, and with U.S. stock market on track for a third weekly drop, talk of a correction is back in vogue, but market strategists say the will have to first breach its 200-day moving average, which has held amid all the recent down days.

"If you break below 1,900, or the 200-day moving average, a psychological floor, then we'd see selling accelerate," said Sean McCarthy, regional chief investment officer for Wells Fargo Private Bank.

But McCarthy believes the support will hold "at least to get us to the heavier part of earnings," which will eventually overtake headline-fueled anxiety including worries about Ebola, geopolitical tensions and most recently, data illustrating slower economic growth in Europe.

Trader on the floor of the New York Stock Exchange.
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While strategists say a correction would generally be a good thing for the market, investors may have to make due with smaller corrective steps.

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"I would love to clear the decks, it's been over three years now since our last 10 percent correction, but I don't think this is going to get us there, depending on earnings," McCarthy said.

"To have an actual correction would make people feel better; it's been a sticking point for so many investors we talk to," said Bruce McCain, chief investment strategist at Key Private Bank.

"It would be healthy to get down to 1,900, plus or minus, or down to the 200-day moving average, it might invite some buyers in, and reignite some enthusiasm for equity prices," said Mark Lushini, chief investment strategist at Janney Montgomery Scott.

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Short term, "we seem to be in that anxiety zone that often gives way to decent corrections; we're approaching the 200-day moving average on the S&P, so 1,905 essentially," McCain said.

"The many (mini) corrections do relieve some of the pressures in the marketplace, which can consolidate and move higher. We've had three smaller ones this year: a 6 percent one in the first quarter, and 4 percent in the second and 4 percent in the third. We'll see where this one takes us," said McCarthy of the latest decline, which has the Dow Jones Industrial Average off about 4 percent from its Sept. 19 record of 17,350.64.

If nothing else, the market's pause "has at least taken some of the outrageous valuation concern out," McCain said.—