Monday’s market decline was brutal. The Dow Jones Industrial Average was down over 1,000 points. The S&P 500 Index opened below its 50 day moving average and below a long term uptrend line on the daily chart.
The S&P did attempt a bit of a recovery in the Monday session around 3:00 o’clock in the afternoon. It rallied back up 1.3% from its session low to its opening downside gap level. This formed a bullish hammer candle on the daily chart but it was temporary. The index could not hold the intraday advance and quickly faded back down to session lows in the remaining hour of trading.
Interestingly, Monday’s low on the S&P 500 was exactly one tick above its January low. This 3214.64 support level will be the key technical level to focus on over the short term. It represents the support level of a horizontal trading channel we discussed in the “Off the Charts” segment of Mad Money with Jim Cramer earlier in the month. A bounce off this support level and a resumption of the primary uptrend is certainly a possibility (and the Tuesday futures are indicating some strength). But if the 3214 support level should fail, it would be a technically and psychologically destructive outcome. In the event of further downside we have highlighted several potential technical support levels on the daily chart.
On Monday the S&P 500 Index closed down about 5% off its recent all-time highs. If we measure Fibonacci retracements from the 2019 lows to the recent all time high the 38% retracement level is situated in the 3136 area. A test of that level would be a 7% decline off the highs. The 50% Fibonacci retracement level is in the 3058 area. It represents a nearly 10% retracement and textbook correction that would likely intersect with the 200 day moving average.
If primary channel support is broken these Fibonacci levels should supply secondary downside support. But in a volatile market like this current one confirmation of any technical level is key. Technical levels have to prove their worthiness and withstand retests. Under current market conditions it is a tall order.