Stock market setting up for a textbook seasonal correction, chart analysts say

Published Mon, Aug 7 20239:34 AM EDTUpdated Mon, Aug 7 202310:38 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Last week's hiccup in the stock market rally could expand into a seasonal slump, according to Wall Street technical analysts. The S & P 500 fell 2.27% last week for its worst week since March, closing at 4,478.03. The Nasdaq Composite fell 2.85%, also its worst week since March. .SPX 3M mountain The S & P 500's rally cooled last week. Oppenheimer technical analyst Ari Wald said in a note to clients dated Saturday that the market is "developing as a textbook seasonal correction." "We show the S & P 500 typically bottoms in late August in a pre-election year, and into this time target, we believe the index becomes increasingly attractive toward 4,300," Wald said. The index would need to fall 4% more to hit that level, Wald said. This month also tends to be a weak seasonal period when the market has been in an uptrend, according to Bespoke Investment Group. The S & P 500 is still up more than 16% year to date even after last week's decline. "August has typically been a 'breather' month when the market has been up big YTD ( > 10%) through July," Bespoke said in a post on X, formerly known as Twitter. In addition to the seasonal patterns, the market's reaction to the second-quarter earnings season that's winding down suggests that buyers are becoming exhausted, Wald said. "Based on average one-day price change, the market reaction has been negative in the current quarter (-0.26%) vs. positive in the prior (+0.35%). A bearish reaction to bullish news is often viewed as an indication that the positives have been discounted. This gives added credence to the July 27th bearish engulfing pattern that suggests buyers are fatigued," Wald added. Wolfe Research analyst Rob Ginsberg also pointed out in a note Saturday that last week's slide came as the market ran into long-term technical levels. "It wasn't a random spot either. [M]any indices, such as the Equal Weight S & P ... sat at key resistance levels. In fact, a 5% pullback from Tuesday's close in the S & P would take you just shy of the August '22 highs," Ginsberg said. Just as chart watchers look for key resistance levels to target where a rally can end, there are also downside resistance levels that can provide clues to where stocks might stabilize. BTIG technical strategist Jonathan Krinsky said in a note Sunday that the S & P 500 might need to fall about 6% to 4,200 before finding its footing again. "[T]he SPX put in a few ugly days last week and now is poised to test some support levels. Initially the rising 50 [day moving average] at 4406, but more meaningful support comes in at 4200-4300. A test of 4200 would be ~9% off the recent highs," BTIG's Krinsky said. — CNBC's Michael Bloom contributed reporting.