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How Low Can the S&P 500 Go? Exploring Technical Analysis and Financial Drivers

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Last weekend’s article warned that the S&P 500 (SPY) was at risk of a bearish collapse. While the market may not have experienced a collapse, recent action has been far from bullish. The significant break of the 200-day moving average, a widely-watched chart indicator, is concerning. Traders often say that β€œnothing good happens below the 200dma.”

With a minimum downside target of 4049, investors and traders want to understand how low the S&P 500 could actually go. This article will analyze various technical indicators, consider multiple timeframes, and examine key market drivers to provide actionable insights, important levels, and expectations for future price action.

S&P 500 Monthly Analysis

As October comes to a close, it’s unlikely that the S&P 500 will rally back to nullify a bearish bar and create a β€œdoji” by reaching the open at 4284. Instead, the focus shifts to how the November bar will shape up and whether it will continue the downward trend or signal a reversal.

Currently, monthly support has been tested in the 4130-40 area, which aligns with the 20-month moving average and the high volume node. This level represents an area where significant trading activity has occurred over the last two years, making it a fair price to buy and sell. While not a traditional support level, it’s likely that price will gravitate towards this area.

If support holds, the November bar could develop a reversal pattern within the October range or briefly test lower before recovering. These scenarios would indicate a rejection of lower prices. However, if the November bar continues lower, the next significant monthly support is at 4049, which coincides with a low volume node and the April/May double bottom. This level is also the 50% retracement of the 2022-2023 rally.

Traders should closely monitor the early stages of the November bar and pay attention to clues from lower timeframes to determine which scenario is more likely.

S&P 500 Weekly Analysis

The weekly channel has been convincingly broken, signaling the end of the uptrend that started in October 2022. The recent bounce in the early part of the week, which turned lower at the undersides of the broken channel, provides further evidence of a new phase in the market. The possibilities for this stage range from a new bear market with a target of 3280 to a smaller drop ending around 4049 within a sideways range.

The recent drop found support at 4103.78, precisely at the weekly TDST (Tom DeMark Sequential Trend). A sustained break below this level is unlikely without a recovery or consolidation. Initial resistance now lies at the 50-week moving average and the 4195 level.

S&P 500 Daily Analysis

While Friday’s close was weak, it’s likely that the low will be undercut at some point. However, traders should look for a bounce rather than a bottom in the 4100 area. This level aligns with the channel support and the aforementioned weekly level.

A daily Demark exhaustion signal completed on Friday, which may temporarily slow the decline. However, a sustainable bottom would likely require a weekly exhaustion signal, which is still in the development phase. The daily head and shoulders pattern is nearing its target of 4066 (not 4093 as previously labeled) and traders who are short on this pattern are likely to cover into weakness.

Volume has been picking up, although it has not yet reached capitulation levels. Resistance is currently at 4186-89, 4216, and the 200-day moving average at 4240. Support levels lie at 4100-103 and 4049.

Market Drivers and Events Next Week

Next week is expected to be busy, with potential end-of-month re-balancing on Monday and Tuesday. Depending on October’s close, November may continue the downward move at some point. The Federal Open Market Committee (FOMC) meeting is scheduled for Wednesday, with data on ISM Manufacturing and JOLTS Job Openings also set to be released. Despite rising inflation, a blow-off Nonfarm Payrolls (NFP) number, and GDP printing at 4.9% for the week, interest rates are expected to remain steady. Federal Reserve Chairman Jerome Powell may underscore the plan for β€œhigher for longer” rates while attempting to sound hawkish.

Apple (AAPL) earnings are scheduled for Thursday after the market close. Overall, the earnings season has been positive, with 3Q23 EPS posting around a 9% gain over figures from 3Q22. However, the impact of earnings on the market has been limited, indicating the influence of other driving factors.

The NFP report will be released on Friday, with expectations set at 182k, a considerable drop from last month’s surprise of 336k. Another upside surprise in job growth would pose a challenge for the Federal Reserve.

Probable Moves in the Coming Weeks

Mondays have shown considerable strength in recent weeks, with a 15-day streak of higher closes, the longest ever recorded. Even when closing slightly lower, there was still a 66-point rally. The odds for another strong Monday appear decent, especially with support levels already tested and the presence of a daily exhaustion signal. A strong close above 4118 could set the stage for a move towards 4156-70 leading up to the FOMC meeting.

However, it’s important to note that any low made next week is unlikely to mark the bottom. Even if there is a multi-week rally through 4216 and potentially into the 4400s, it would only set up another leg lower later on, with a minimum target of 4049. If a larger bounce is to occur, it needs to begin next week. Any further bearish price action below 4100 would indicate a more direct move lower, with potential bounces at 4049 and 3917. The March low at 3808 could eventually become the target.

While it’s possible that the S&P 500 could collapse further to 3491 or even 3280, it’s too early to make such predictions. Other factors, such as patterns in the Dow Jones (DJI), suggest that this scenario may not play out. Calling such significant moves requires more evidence, especially if the S&P 500 crashes directly to 3800 with minimal reactions at support levels.

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