Charts show stock sell-off not over and broader market could correct 10% or more

Published Wed, Jan 19 20222:06 PM ESTUpdated Wed, Jan 19 20224:12 PM EST

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

Wednesday's choppy action makes it clear the stock market has not hit bottom, and the S & P 500 could fall into a 10% or more correction before the sell-off is over, according to strategists who follow market charts. The analysts say the S & P 500 could fall another 5% or more, joining the Nasdaq in correction territory. A correction is a decline of 10% or more from highs. Stocks attempted to bounce several times Wednesday but failed and sold off into the close. The Nasdaq Composite closed down 1.2% at 14,340, following a 2.6% decline Tuesday, its worst day since Jan. 5. The Nasdaq is now 10.7% from its November high. The index also closed Tuesday below its 200-day moving average for the first time since April 21, 2020. The 200-day is basically the average of the last 200 closes, and a sustained fall below it could signal more negative action. The 200-day was at 14,734 Wednesday. Scott Redler, partner with T3Live.com, described the selling as "pretty extreme." "But it doesn't feel like it's going to be the bottom of the market," said Redler. He said with the Nasdaq's steeper decline, it makes the rest of the market more vulnerable, and it is more likely traders will sell into any strength. Redler said the S & P 500, off about 6% from its high, could see a low of 4,320 before the selling is over. That level is the 50-day moving average on a weekly basis, he noted. The S & P 500 ended Wednesday down nearly 1% at 4,532. "The first test for the bulls would be 4,500. If that level were to break, the likely spot would be a corrective move back to 4,320," Redler said. Redler said the market will continue to face headwinds from expectations the Federal Reserve will raise interest rates four times this year, starting in March. Ahead of the Fed's move, the 10-year Treasury yield temporarily hit a high of 1.9% in early Wednesday trading and could continue rising. Technology has been particularly vulnerable to moves in the 10-year and opened higher in Wednesday morning trading as the yield fell from its highs. "When what's usually the healthiest sector out there is acting the faultiest, usually other sectors follow," Redler said. Mark Newton, Fundstrat chief technical analyst, said he expects the Nasdaq could fall further to the October lows. "I think we're about two weeks away from a good trading low in stocks. We're getting closer, but we're not quite there," he said, adding stocks could then rally in February and March. "I think the Nasdaq can get down to the October lows, 14,181...I think the S & P will test and probably get through December's lows by a small amount." Newton expects the S & P could trade as low as 4,450 to 4,495. "I'm encouraged to see some evidence of fear return to the market. People are very disgruntled that January has been straight down," Newton said. Katie Stockton, founder of Fairlead Strategies, said she expects to see a bounce in the S & P 500 before it again sells off and bottoms. "The S & P 500 is now oversold for the first time since early December. There are some indications that we're going to get a bounce," she said. The index could then go lower to test support at 4,200. "You could make a case for a 10% down move for the S & P 500 after a little bit of a bounce," she said. Two charts that have begun to look attractive represent short positions in major indexes, she said. One is the ETFs that represents a short in the S & P 500, the ProShares Short S & P 500 and the other is the ProShares Short QQQ . Stockton said she is watching for a pending breakdown in the Nasdaq 100 , the basis for the popular ETF PowerShares QQQ Trust . "People are a bit worried about this price action, and reasonably so," she said. She is watching the 15,575 level on the Nasdaq 100. The index was slightly higher, at 15,246 Wednesday afternoon. "The confirmation occurs when you see a second close below the level," she said. She said the S & P 500 is currently outperforming the Nasdaq 100 but she does not expect it to do markedly. Should the Nasdaq 100 confirm its breakdown, it could move another 5% lower to 14,400 support and that would make it more likely the S & P falls also breaks down after an oversold bounce. She said a breakdown in the Nasdaq 100 would then lead to a more conservative positioning with more market hedges and reduced exposure.

Traders work on the floor of the New York Stock Exchange (NYSE) on December 02, 2021 in New York City.

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