Strategists who watch stock charts say the market is at a pivotal point, and the action Thursday and Friday could be important determining the direction the rest of the year. Stocks opened higher Wednesday but reversed hard after reports of the first case in the U.S. of an individual with the omicron variant of Covid. The market closed at its lows, with the Dow off 1.3% and the S & P 500 off 1.2% at 4,513. The reversal pushed the S & P 500 below the widely-watched 50-day moving average, at 4,539, and now chart strategists are watching to see if the index remains below that level. The 50-day is literally the average closing level of the last 50 days, and a break below it would suggest another potential move lower. "With [Wednesday's] reversal, I'd think volatility continues with the next [S & P 500] level to test at the 100-day near 4,480 with a possibility of the 200-day near 4,300," notes Scott Redler, partner with T3Live.com. The sharp move was also accompanied by outsized moves in some stocks that have been darlings. For instance, CrowdStrike Holdings was down 7%; PayPal was off 3.1% and Affirm Holdings was down 8%. Affirm at $116.57, is $60 off its Nov. 4 52-week high. DraftKings , off about 10% Wednesday, was down 36% in the past month, while First Solar is down 16% in a month. "The leaders of not more than 20 days ago are down in bear market territory, just like that," said Redler. He said the violent swings both to the upside and then downside are not good signs technically. "There aren't that many names acting special either. Except for Apple and that reversed today." Strategists said there seemed to be some hedge fund selling, but also possible forced liquidations and tax-related selling, as investors sold losers for tax losses while holding onto their biggest winners. "I think a lot of it is tax loss selling. I think a lot of the poor names are doing worse because people are taking tax losses because they have so many gains elsewhere," said Steve Massocca, managing director at Wedbush Securities. Redler said the omicron headlines were a catalyst again Wednesday, but the markets are more likely reacting to the idea that the Federal Reserve and other central banks are going to take away accommodation. Prior to Wednesday's sell-off, stocks sold off hard on Friday and again Tuesday on concerns the omicron variant of Covid could impact the economy. On Tuesday, comments from Federal Reserve Chairman Jerome Powell that the Fed could taper its bond purchases more quickly added to losses. Katie Stockton, founder of Fairlead Strategies, said the market became a lot more volatile Wednesday with the swings in both directions. The S & P 500 ranged between 4,652 and 4,510. "The real tell for me will be whether we come back [Thursday]. The real tell will be whether these hedge funds come back and do it again," she said. She said it appeared hedge fund de-risking was behind some of the big drops in individual stocks. Stockton said the S & P 500 broke support at 4,546, and now she is watching to see if it remains below the 50-day moving average. The Russell 2000 also had an important move, falling below its uptrend line near 2,180, Stockton noted. The Russell, up more than 2% during the trading day, ended Wednesday's session at 2,147, off 2.3%. The Dow also closed below its 200-day moving average level of 34,360.94 for the first time since July 13, 2020, and Nasdaq closed below its 50-day moving average level of 15,266.03 for the first time since Oct. 14. "This places a good deal of weight on the next two days, which will determine whether breakdowns are confirmed, and whether the VIX will finish the week decisively above our risk threshold of 29 (currently near 31)," she said in an email. The VIX , the CBOE's Volatility Index, was up 14.5% Wednesday at $31.12, after trading down double digits earlier in the day while stocks were rising. Stockton said if the S & P again closes below its 50-day moving average, the confirmed breakdown would increase the risk that the S & P reaches the 4,300 level. In the case of the Russell 2000, it could test previous support at 2,066 or 2,085 area. "Conversely, a strong close back above support [Thursday] would provide a contrarian (bullish) takeaway," added Stockton. Stockton said the Russell 2000 could have been hit by the hedge fund de-risking that was knocking down individual stocks. Many hedge funds trade the IWM, iShares Russell 2000 ETF. Some strategists still see a chance for stocks to rally into year end. "December is the second best month of the year, second only to April. On average, the S & P 500 rises 1.6% and is up an average 76% of the time," said Sam Stovall, chief investment strategist at CFRA. Stovall said he expects a positive end to the year. He added that when stocks decline in November, the upside for the S & P 500 in December is an average 2.8% and it has risen 88% of the time. The S & P was off 0.8% in November, compared to the 1.9% drop in the Russell 2000, giving the small cap index its worst month since March 2020. "We still believe in Santa and a "Santa Claus" rally, " wrote Wells Fargo Securities strategists in an early Wednesday note. The strategists said they weren't ready to "pound the table" yet on the market though the sell-off has created some bargains, with many individual stocks down more than 10%. The Wells Fargo strategists said investors should look for opportunities among stocks that were hit hard but still have good momentum. They listed a number of companies from the firm's outperform list that were down by 10% or more, have good 12-month momentum and above average or average quality ratings on earnings, margins and balance sheets. Some of the names on that list were American Express, Lyft, Hess Corp, Fox Corp, EOG Resources, Intutitive Surgical, Intellia Therapeutics, Olin Corp, Tenable Holdings. Cooper Cos and Inspire Medical Systems.
A trader works on the floor of the New York Stock Exchange (NYSE).
Spencer Platt | Getty Images
Strategists who watch stock charts say the market is at a pivotal point, and the action Thursday and Friday could be important determining the direction the rest of the year.