Stocks look set to test January lows this week, chart analysts say

Published Wed, Feb 23 20228:49 AM ESTUpdated Wed, Feb 23 20228:07 PM EST

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

After closing in correction territory on Tuesday , the S & P 500 looks set to test the low levels it reached in January, chart analysts say. Technical strategists say that test could come this week. The S & P 500 ended Tuesday down 1%, at 4,304 - about 82 points above the low of 4,222 it reached on Jan. 24. The broad-market index was off 10% from its January high. "The dreaded retest is here," said Katie Stockton, founder of Fairlead Strategies. She said both the S & P 500 and Nasdaq Composite are heading back to lows. The Nasdaq was down 1.2% at 13,381 Tuesday. It reached a low of 13,094 on Jan. 24. Stockton said she is watching similar action led by high-growth names, some of which have already been testing and breaking their lows. "We're taking cues from the high-growth areas, but the signals are more from the momentum indicators," she said. Stockton noted that the iShares Expanded Tech-Software Sector ETF, which contains many once high-flying software firms, was trading near its Jan. 24 low of $322.05. It closed Tuesday at $324.87, down 0.8%. The fund holds Microsoft and Oracle, but also DocuSign, ServiceNow, Palantir and Zscaler. "It's even the darlings... It's happening in the mega cap arena as well. That's something the major indices can't ignore. The risk is pretty high that we take the cue from the high-growth names, and I believe there's a possibility we break those January lows," Stockton said. Tesla, for one, has been breaking down since it started trading below $900 last week, she said. The stock broke its 200-day moving average of $830 Tuesday and hit $801.10 at its low of the day. Tesla's January low is $792. The metric measures the average of the last 200 closing prices in a stock or an index. A break below it is considered negative. But after the S & P 500 tests the lows, the question of what happens next is less clear. March rally? Stockton said the level she is watching on the S & P 500 is 4,200, a key retracement level below the January low. She said an intermediate-term bottom could be reached between there and 4,000, and stocks could rally in March. Mark Newton, Fundstrat's global head of technical strategy, said he expects the retest could result in the bottom being set at the current low of 4,222 on the S & P 500. "I think we're close to bottoming out. It could happen this week. The majority of damage is done," said Newton. He said he expects investors would be rewarded for buying the dips this week for a push higher into mid-to-late March. "The real fear happened in January," he said. Newton said there are positives in short-term momentum. For instance, the percentage of stocks above their 20-day moving average, a short-term momentum indicator, is nearly double the number in January. That's due to the performance of energy and financial stocks, he added. Another low for year? "I think we hold and bounce. There's no saying the lows for this entire move are in. I think you have the potential for another move in March, but I think we're setting up for a March rally at a time when sentiment is getting more negative," he said. "I think in the next three-to-five months, we could have difficulties. I think rallies into, and or after the FOMC meeting in March are going to end up failing and we're going to turn back south." The Federal Reserve's Federal Open Market Committee meets March 15 and 16 and is expected to raise interest rates for the first time since 2018. Economists expect as many as six more interest rate hikes following the March move. Newton said he then expects a low for the year in July, and the market should trade in a V-shape for 2022, with the S & P 500 going higher toward the end of the year.

Traders work on the floor of the New York Stock Exchange at the opening bell on February 22 2022, in New York.

Timothy A. Clary | AFP | Getty Images

After closing in correction territory on Tuesday, the S&P 500 looks set to test the low levels it reached in January, chart analysts say.