The Technical Indicator: Charting a market downdraft, S&P 500 sells off to major support

The downturn has thus far inflicted largely localized damage — amid market rotation — though several key technical tests remain underway. The charts below add color:

Before detailing the U.S. markets’ wider view, the S&P 500’s SPX, -1.69% hourly chart highlights the past two weeks.

As illustrated, the S&P has reversed sharply from record highs, pressured amid a swift downdraft.

Tactically, the breakout point (3,393) marks notable support and is followed by 3,360, a level defining the S&P’s former projected target.

Meanwhile, the Dow Jones Industrial Average DJIA, -1.26% has pulled in sharply from six-month highs.

The downdraft places the index back under resistance matching the February gap (28,403).

On further weakness, the former breakout point (27,580) marks major support, an area better illustrated on the daily chart.

Against this backdrop, the Nasdaq Composite COMP, -2.60% has paced the early-September market downdraft.

In fact, the index has plunged as much as 9.9% — from high to low — across just three sessions.

(The S&P 500 has dropped as much as 6.6%, the Dow industrials have dropped as much as 5.3%.)

Notably, the 50-day moving average, currently 10,884, has thus far underpinned the downturn, an area also illustrated below.

Widening the view to six months adds perspective.

On this wider view, the Nasdaq has reversed sharply from record highs, pressed amid a September downdraft.

Consider that the September low (10,875) has closely matched 50-day moving average, currently 10,884, to punctuate a 9.9% plunge.

The 50-day moving average — a widely-tracked intermediate-term trending indicator — has underpinned the prevailing trend since April.

Tactically, deeper support broadly spans from about 10,760 to 10,840, levels matching the August low and the former breakout point. An eventual violation would mark a “lower low” raising a caution flag. The Nasdaq’s intermediate-term bias remains bullish pending such a move.

Looking elsewhere, the Dow Jones Industrial Average has pulled in respectably, though less aggressively than the Nasdaq Composite.

Tactically, the breakout point (27,580) is followed by the ascending 50-day moving average, currently 27,160.

Recall that the 50-day moving average effectively defined the May, June and late-July lows. The Dow’s intermediate-term uptrend is intact barring a violation.

Meanwhile, the S&P 500 has topped slightly under the 3,600 mark, and reversed sharply from record highs.

A retest of the breakout point (3,393) remains underway.

Also recall that the S&P 500’s preceding breakout registered as unusually powerful, encompassing three closes atop the 20-day volatility bands across a narrow six-session window. The two standard deviation breakout signaled a near-term extended posture — due a cooling-off period — amid a bullish longer-term backdrop. (See the early-June breakout, and subsequent pullback.)

The bigger picture

As detailed above, the major U.S. benchmarks have reversed sharply from recent highs, pressured amid the most aggressive selling pressure since June.

Against this backdrop, technical damage has been inflicted, in spots, and the prevailing backdrop is not one-size-fits-all.

Broadly speaking, each benchmark’s intermediate-term bias remains bullish, based on today’s backdrop, though the prevailing downturn is worth tracking for potential acceleration.

Moving to the small-caps, the iShares Russell 2000 ETF has pulled in from the September peak amid increased volume.

Tactically, the breakout point (153.39) is followed by the 50-day moving average, currently 150.25.

The 50-day has underpinned the prevailing trend since April, though a retest remains underway early Tuesday.

Meanwhile, the SPDR S&P MidCap 400 ETF has stalled near resistance matching the June peak. (The MDY tagged a nominal six-month closing peak last week.)

Here again, the downturn places the 50-day moving average in play to punctuate last week’s false breakout.

Recall that the small- and mid-caps’ 2019 price action was punctuated by several rabbit-from-hat downdrafts at key inflection points.

Looking elsewhere, the SPDR Trust S&P 500 SPY, -1.66% has pulled in from record highs amid increased, though not completely off-the-charts, volume.

Consider that the June downdraft was fueled by stronger volume to punctuate the truly massive-volume March meltdown.

More immediately, the September downturn has been fueled by conspicuously tame internals, on the order of 3-to-1 negative breadth. (Declining volume surpassed advancing volume by a 3-to-1 margin.) In a textbook world, a 7-to-1 downturn (or greater) would more reliably raise a caution flag.

Tactically, the breakout point (338.35) is followed by the deeper 50-day moving average, currently 330.00.

Placing a finer point on the S&P 500, the index has reversed sharply, pulling in as much as 6.6% from its record peak.

The downturn has traversed a less-charted patch — or an air pocket — punctuated by poorly-defined support. An overdue consolidation phase is underway.

Tactically, the breakout point (3,393) marks the S&P’s first notable floor and is followed by 3,360, a level defining the S&P’s former projected target.

On further weakness, the mid-August low (3,326) closely matched the early-2020 breakout point (3,328).

Delving deeper, the 50-day moving average, currently 3,305, is rising toward support. The 50-day has underpinned the prevailing trend since April.

As always, it’s not just what an index does, it’s how it does it. But generally speaking, the S&P 500’s intermediate-term bias remains bullish barring a violation of the areas detailed.

Also see: Charting a rally to ‘clear skies’ territory: S&P 500, Nasdaq extend summer breakouts.

Tuesday’s Watch List

The charts below detail names that are technically well positioned. These are radar screen names — sectors or stocks poised to move in the near term. For the original comments on the stocks below, see The Technical Indicator Library.

Charting limited U.S. sector damage amid market rotation

Drilling down further, the September market downdraft has thus far inflicted localized U.S. sub-sector damage. Broadly speaking, large-cap technology names have borne the brunt of the selling pressure amid still generally rotational price action. Several groups exemplify the prevailing backdrop:

To start, the Invesco QQQ Trust QQQ, -3.25% — an ETF designed to track the Nasdaq 100 Index — offers a large-cap technology sector proxy.

As illustrated, the group has reversed sharply from record territory, pressured amid a sustained volume spike.

In the process, the QQQ has already plunged as much as 10.4% from its record high across just two sessions. An overdue consolidation phase — or cooling-off period — has swiftly taken hold.

Tactically, trendline support is closely followed by the breakout point (274.60) and the ascending 50-day moving average, currently 269.90. The QQQ’s intermediate-term bias remains bullish barring a violation.

Meanwhile, the SPDR S&P Biotech ETF’s XBI, +0.74% backdrop has turned more firmly bearish.

As illustrated, the group has reached 10-week lows, violating well-defined support on increased volume.

The downturn punctuates a failed test of trendline resistance, and the 50-day moving average, at the early-September peak.

More broadly, the group’s divergence initially surfaced last month, as it registered a “lower high” even as the major U.S. benchmarks staged August breakouts.

Tactically, the breakdown point (108.00) pivots to resistance. A rally atop this area would mark a step toward stabilization.

Sector strength persists amid market rotation

Looking elsewhere, pockets of relative sector strength persist. Four groups exemplify the prevailing backdrop:

To start, the Materials Select Sector SPDR XLB, -1.05% has sustained a September break to all-time highs. (Yield = 2.1%.)

The early-month upturn was fueled by increased volume, and the group has subsequently maintained its breakout point (63.10), detailed previously. Bullish price action.

Delving deeper, trendline support is followed by the 50-day moving average, a level that has defined the recent trend. The group’s intermediate-term path of least resistance points higher barring a violation.

Meanwhile, the Industrial Select Sector SPDR XLI, -0.75% has sustained a recent rally to six-month highs.

Here again, the group has maintained a posture atop its breakout point (76.15) amid a strong-volume — but relatively shallow — September pullback.

Delving deeper, the 50- and 200-day moving averages have marked inflection points. The group’s intermediate-term bias remains bullish barring a violation.

Looking elsewhere, the iShares Transportation Average IYT, -0.01% is acting well technically.

The group initially spiked four weeks ago, knifing atop resistance matching the June peak. The steep rally marked a two standard deviation breakout, encompassing four straight closes atop the 20-day Bollinger bands.

More immediately, the group has asserted consecutive flag patterns, digesting the decisive August breakout. The bull flags are continuation patterns amid September selling pressure that has yet to inflict damage.

Tactically, a violation of the former breakout point (190.00), and trendline support, would raise a caution flag.

Finally, the Financial Select Sector SPDR XLF, -1.73% has not broken out, though its September price action is constructive.

As illustrated, the group has pressed its 200-day moving average, currently 25.64, a widely-tracked longer-term trending indicator.

Slightly more broadly, the group has rattled a tight range underpinned by trendline support amid increased volume.

Tactically, the former range top (24.50) is closely followed by the 50-day moving average (24.30), a recent bull-bear inflection point. A breakout attempt is in play barring a violation.

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Still well positioned

The table below includes names recently profiled in The Technical Indicator that remain well positioned. For the original comments, see The Technical Indicator Library.