Stock charts warn of chance for bigger market decline as Fed decision looms

Published Wed, Sep 22 20217:06 AM EDTUpdated Wed, Sep 22 20219:33 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

After a failed rebound , analysts who study charts to make buying decisions say more trouble may bee looming for stocks, especially as the market heads into the uncertainty of the Federal Reserve's statement coming Wednesday afternoon. Stocks started Tuesday higher, a day after the worst sell-off since May, but by the end of the day, the Dow and S & P 500 were lower. The S & P 500 , in fact, closed just slightly lower at 4,354, and remained significantly below its 50-day moving average, now at 4,435. It was the first time this tear that the index held below that key momentum indicator for more than one day. The 50-day is the average of the last 50 closing prices, and if the index or a stock falls below it, it could signal steeper declines. But in other instances this year, going back to January, the index has bounced off it. Katie Stockton, founder of Fairlead Strategies, said that Tuesday marked a short-term breakdown for the S & P 500. But the VIX, the Cboe's Volatility Index, ended the day below 25 and has not yet signaled a breakdown. A higher VIX indicates more market volatility. "We don't have a corresponding breakdown on the VIX. I think it's only a matter of time, particularly with the FOMC announcement looming and the inevitable volatility on the back of that," she said. "I do think with this short-term breakdown, there's greater risk for a more significant pullback and a more prolonged pullback." The Fed is widely expected to signal that it is close to starting the wind down of its $120 billion a month bond-buying program, its first major step away from easing policies instituted during the pandemic. The program was intended to create liquidity in financial markets, and some strategists say it helped boost asset prices, including stocks. The Federal Open Market Committee issues its statement at the end of its two-day meeting Wednesday at 2 p.m. ET, along with new projections on the economy and interest rates. If its forecast includes rate hikes, particularly in 2022, that could bring even more market volatility. Fed officials currently forecast the first two interest rate hikes in 2023. The stock market is also in one of the most difficult periods of the year historically. This week is often negative, and volatility is historically high in September and October. Stockton said the market did not trade well Tuesday, since "we didn't see it rip higher." However, technology stocks held, boosting the Nasdaq. She said some Big Tech FANG names held their ground and are being treated as a defensive play. Now that the S & P has lost the 50-day, a second support level could be down at 4,238. She said she will reassess her view if the S & P reaches that point. Scott Redler, partner with T3Live.com, had been expecting the S & P 500 to fall 5% from its highs, and it reached that level Monday. Now, he remains cautious in a market that looks like it could sell-off more. "After an 18% move to the highs of the year, is 4% to 5% enough to sell off during the September, October calendar?" he said. "I don't' think anyone's making big bets, and more people are on their toes, including me." Redler said the longer the S & P stays below the 50-day, the greater its chance of heading lower. He said there is other negative headline risk besides the Fed, including the debt ceiling standoff and proposals for higher taxes. Traders are also watching developments around Chinese property developer Evergrande, which has debt payments due Thursday. "The longer we stay below 4,420, the higher the probability the 4,305 pivot low of Monday does not stick, and we see a bigger retracement to the downside," he said, noting a break there could send the S & P 500 toward its 200-day moving average at 4,165. Frank Cappelleri, executive director at Instinet, said the S & P remains in a bearish formation, and his next target is 4,215. "Bulls would say that [Tuesday's] action simply was a digestive phase after [Monday's] 1.3% spike from 3:15 to 4:00," he wrote in a note. "While the opening lift wasn't extended, the 4,350-level held, creating a short-term higher low vs. yesterday." But those with a negative view of the market would have a different take on the action. "Bears would view it more as a failure to leverage the extreme oversold indicators highlighted this morning, i.e., a dead cat bounce, " he added.

Traders on the floor of the New York Stock Exchange, with Blend signage, July 16, 2021.

Source: NYSE