Five straight weeks of declines for the S & P 500 have many investors asking just how far this market pullback can go. Technical strategists have an answer, but it's not what many want to hear. The S & P 500 and other market indexes have blown through key support levels in recent weeks, including their 50-day and 200-day moving averages — which are viewed by some as near- and long-term momentum indicators. The S & P 500 was at risk of closing below 4,000 on Monday for the first time since March 2021. Many of the top technical strategists on Wall Street see the S & P 500 falling below the 4,000 mark and possibly to 3,800 in the weeks ahead. One reason for negativity is last week's Wednesday rally, which quickly dissipated Thursday. The upward move was strong on a daily basis but failed to break the market out of its downward trend, according to Bank of America's Stephen Suttmeier. "The post-FOMC rally was nearly a 90% up day for NYSE stocks, but the S & P 500 (SPX), NASDAQ 100 (NDX), and Russell 2000 (RTY) all stalled at first resistance. These levels remain solid first resistance at 4300-4308 on the SPX, 13,540-13,557 on the NDX, and 1952-1954 on the RTY," Suttmeier wrote in a note to clients. One thing that technical analysts look for in down markets is "capitulation," which includes a variety of technical and survey factors to show that investors are at the lowest possible point of optimism. The market has recently had a few of the things analysts look for, including bleak investor sentiment surveys and several trading days with roughly 90% of stocks falling. However, many of the analysts seem to believe the true give-up point has not yet been hit. "While bounces can and will occur, we continue to look for an eventual move to sub-4k. Despite pessimistic surveys, we continue to believe what investors are doing is different from what they are saying and believe there is still a lack of full capitulation," BTIG's Jonathan Krinsky wrote in a note to clients. While the sell-off might seem unusually long, there is precedent for losing streaks like this, according to JC O'Hara MKM Partners. History also shows that they can extend past five weeks, meaning that there may still be some people who need to sell before the market can bottom. "Buying the market simply because it is down a lot (in this case for five straight weeks), is not a viable strategy. We can see once we reach five negative weeks, we typically have a few additional weeks of weak price action," O'Hara wrote in a note to clients. The 3,800 level on the S & P 500, which is roughly 8% below where the index closed Friday, has emerged as a key area to watch for market technicians. One reason why is that it is roughly 20% below the S & P 500's all-time high — which would put this pullback in line with some historical precedents. "Overall, we expect the S & P 500 to decline roughly 20% peak-to-trough over a 7- to 9-month period and retrace about 38% of the prior 2020-2022 advance; this is based on the median cyclical bear in a secular bull. This road map suggests downside risk to 3,800 by Q3'22," Oppenheimer's Ari Wald wrote in a note to clients. Similarly, Canaccord Genuity's Javed Mirza said in a note that there were upcoming support levels at 3,935 and 3,699, if the market keeps falling. MKM's O'Hara singled out 3,750 as a key line in the sand. As the index falls and tests these levels, investors should keep an eye on the components of the market to see when a bottom has truly been found instead of a false rally, according to Oppenheimer's Wald wrote. "We'll also be watching for indications of capitulation to signal a major market bottom. For instance, we're closely monitoring the percentage of NYSE stocks above their 200-day average to drop below 20% to signal a long-term buying opportunity (currently 30%)," Wald wrote. — CNBC's Michael Bloom contributed to this report.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, May 9, 2022.
Brendan McDermid | Reuters
Five straight weeks of declines for the S&P 500 have many investors asking just how far this market pullback can go. Technical strategists have an answer, but it's not what many want to hear.