- A sharp sell-off pushed the S&P 500 below key technical levels Wednesday.
- "The selling is a result of selling the best performing stocks this year and it is difficult to time when that selling pressure will slow," says JC O'Hara of MKM Partners.
- The steep decline raises red flags for top chart analysts, who think that more pain could lie ahead for equity investors.
With the U.S. stock market in the midst of an October sell-off, Wall Street analysts who study charts for a living are worried the situation could get much worse. Among the reasons that have technical analysts concerned are a breakdown in the bull market leaders and a drop by the S&P 500 below its average price of the last 50 days.
The is down 2.5 percent for October and counting amid Wednesday's slide.
"The selling is a result of selling the best performing stocks this year and it is difficult to time when that selling pressure will slow," said JC O'Hara, chief market technician at MKM Partners, in a note. "The best-performing decile of S&P 500 stocks this year is lower by 6.6 percent in October. Today, that basket is lower by 1.7 percent (the worst of all 10 deciles)."
"Until we see some stabilization in that basket, we will continue to see weakness," O'Hara said.
Chipmaker stocks also fell sharply, with the VanEck Vectors Semiconductor ETF (SMH) falling 2.7 percent, on pace for its fifth straight day of losses. Nvidia and Micron are both down at least 4 percent.
These declines pushed the S&P 500 below its 50-day moving average, a key technical level. Entering Wednesday's session, the index's 50-day moving average was around 2,880.
Andrew Thrasher, portfolio manager at The Financial Enhancement Group and founder of Thrasher Analytics, said the S&P 500 also breached its January highs.
"What's concerning is that we saw the index break below its January high with narrowing breadth and not getting a confirmation of the most recent high by several momentum gauges," Thrasher said. "To get back to being bullish in broad U.S. equities I want to see SPX recover that January high. If we see stocks continue to slide I'll be looking for the next level of support at 2,790 which is the pivot point resistance in March and June before the breakout higher in July."
October's declines come amid cautious trading on Wall Street on the heels of a spike in borrowing costs, which can dampen corporate profits and the economy.
Higher yields on relatively safer assets — such U.S. Treasurys — can also lure investors out of stocks and into debt and spark a broader rotation across asset classes. The benchmark 10-year Treasury note, a barometer for financial instruments ranging from mortgage rates to corporate bond rates, has climbed about 20 basis points since last Monday. The benchmark rate also hit its highest level in more than seven years in the previous session.
"The yield curve and growth and value are dominating the tape. With growth selling off, I would highlight a lot of stuff is starting to get very oversold," said Robert Sluymer, technical strategist at Fundstrat. "A lot of stuff is oversold. As we roll through the week, I think the market should stabilize."
If the sell-off continures, however, the 2,800 will be a key level to watch for investors, said Frank Cappelleri, executive director at Instinet.
"It's a round number. It was also a key point to move through," Cappelleri said. "When we broke above it, the patterns signaled a move to 3,000. If we move below that on a closing basis, that target is nullified."
The S&P 500 is down more than 3 percent since last Monday. October, though positive for stocks on average, is famous for market crashes in 1929 and 1987, a 554-point Dow drop in 1997, sell-offs in 1978 and 1979 and the meltdown in 2008 after Congress rejected the bank bailout bill.
The decline in the S&P 500 follows a correction in the small-cap Russell 2000, which remains more than 8 percent off its 52-week high.
WATCH: A selloff with no fear
— CNBC's Patti Domm contributed reporting.