The Technical Indicator: Charting a bearish technical tilt, S&P 500 plunges to caution zone

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Technically speaking, a massive single-day market downdraft has inflicted damage to the U.S. benchmarks’ bigger-picture backdrop.

Amid the cross currents, the S&P 500 has violated several inflection points — including the 50-day moving average — with a downdraft placing major support (3,215) firmly under siege.

Before detailing the U.S. markets’ wider view, the S&P 500’s SPX, -1.58%  hourly chart highlights the past two weeks.

As illustrated, the S&P has plunged to a lower plateau from recent record highs.

Consider that Monday’s session low (3,214.6) matched major support (3,215) a key intermediate-term inflection point, detailed repeatedly.

Conversely, Monday’s high (3,259.6) closely matched the S&P’s former breakout point (3,258).

Slightly more broadly, the downturn originates from last week’s close (3,337) matching the S&P’s first notable support.

Meanwhile, the Dow Jones Industrial Average DJIA, -1.65%  has plunged to two-month lows.

Monday’s 1,031 point downdraft marked its third-biggest point drop on record. (To be fair, the downturn also marked something like the 220th worst daily percentage drop.)

Tactically, the bottom of the gap (28,403) marks an inflection point, though resistance is better illustrated on the daily chart.

Similarly, the Nasdaq Composite COMP, -1.38%  has extended a downdraft from recent record highs.

Here again, the downturn originates from last week’s close (9,576) matching the Nasdaq’s first notable support (9,575). This area is also illustrated below.

Widening the view to six months adds perspective.

On this wider view, the Nasdaq has gapped first under its first notable support points at 9,575 and 9,450.

Moreover, Monday’s close registered under the 50-day moving average, currently 9,249, for the first time since Oct. 10. The downturn raises the flag to an intermediate-term trend shift.

Tactically, a swift reversal atop the trendline, and the breakdown point (9,450), would neutralize the downdraft. The pending retest from underneath should add color.

Looking elsewhere, the Dow Jones Industrial Average has registered a more damaging downdraft.

As illustrated, the index has plunged to two-month lows, punctuating a modified double top defined by the January and February peaks. Its prevailing backdrop supports a firmly bearish intermediate-term bias.

Tactically, notable resistance spans from 28,169 to 28,175, levels matching the January low and the November peak. A close higher would mark a step toward stabilization.

More distant inflection points match the 50-day moving average, currently 28,798, and the former breakdown point (28,872).

Meanwhile, the S&P 500 has plunged from recent record highs, registering its worst single-day downdraft in just over two years.

The downturn punctuates a violation of trendline support closely tracking the 50-day moving average, currently 3,277. This marks the S&P’s first close under its 50-day since Oct. 9.

Separately, the initial downdraft has nailed major support at 3,215, a key intermediate-term inflection point.

The bigger picture

As detailed above, technical damage has been inflicted to the U.S. benchmarks’ bigger-picture backdrop.

Though one day rarely alters a trend, Monday’s massive plunge may be an exception. Each big three U.S. benchmark concurrently registered a single-day downdraft exceeding 3.3% for the first time since 2018.

In the process, each index has violated several key levels, including the 50-day moving average.

Moving to the small-caps, the iShares Russell 2000 ETF has also turned lower, knifing under its 50-day moving average amid increased volume.

The downturn originates from former support. Recall that last week’s close (167.10) almost precisely matched its first notable floor (167.12), an area detailed repeatedly.

(Combined, the S&P 500, Nasdaq Composite and Russell 2000 closed last week on key support, leaving them tenuously positioned for Monday’s massive downdraft.)

Meanwhile, the SPDR S&P MidCap 400 ETF has reversed sharply from last week’s nominal record high.

Here again, the strong-volume downdraft places the mid-cap benchmark firmly under its 50-day moving average.

Looking elsewhere, the SPDR Trust S&P 500 has violated key trendlines, and the 50-day moving average, amid a volume spike.

From current levels, inflection points match the 2019 close (321.86) and the January low (320.73). A violation of the latter would mark a “lower low” more firmly signaling a trend shift.

Beyond technical levels, Monday’s market breadth registered bearish extremes in the form of a 10-to-1 down day. (A “down day” means that declining volume surpassed advancing volume by the stated margin. Note that Nasdaq breadth registered as comparably tame, a less than 4-to-1 down day.)

Placing a finer point on the S&P 500, the index has plunged from recent record highs while closely observing familiar inflection points.

To reiterate, Monday’s session low (3,214.6) matched major support (3,215) a key intermediate-term inflection point, detailed repeatedly. The S&P has ventured under support early Tuesday.

Conversely, Monday’s high (3,259.6) closely matched the S&P’s former breakout point (3,258), also detailed previously.

Tactically, the band detailed — spanning from 3,215 to 3,258 — marks an intermediate-term caution zone.

A swift reversal above the top of the gap (3,258) would strengthen the bull case.

Conversely, a closing violation of the 3,215 support would mark a material “lower low” — combined with a violation of the trendline — firmly signaling a bearish intermediate-term trend shift.

Summing up the backdrop

Collectively, the 3,215 support has been designated daily as the intermediate-term bull-bear inflection point. This area has been maintained, thus far, on a closing basis. In fact, the S&P nailed 3,215 Monday.

Still, the way this area has been reached — with a massive single-day plunge, fueled by 10-to-1 negative breadth — raises a genuine caution flag. Follow-through under the 3,215 support would more firmly signal a bearish intermediate-term trend shift.

Also see: Charting a bull-trend pullback, S&P 500 digests break to record territory.

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.

Drilling down further, the 10-year Treasury note yield TNX, -3.85%  has extended its 2020 downturn, reaching three-year lows amid a safe-haven trade. As always, Treasury prices and yields are inversely correlated. (As demand spikes for Treasuries, yields turn lower.)

In the process, the yield has dropped uncomfortably within view of record lows.

The specific levels match the yield’s record closing low (1.366) and absolute record low (1.336), both established July 2016.

Against this backdrop, Monday’s close (1.377) and the session low (1.352) narrowly missed records.

More broadly, the yield staged an aggressive January trendline breakdown, and has subsequently extended lower after a lackluster February bounce. Yield bearish price action.

Tactically, the 2019 low (1.43) is followed by the breakdown point (1.51). A close atop these areas would mark an early step toward stabilization. Also recall that the 50-day moving average, currently 1.73, effectively defined the 2019 trend.

Fundamentally, lower yields translate to reduced borrowing costs, and are generally broad-market positive. Still, the downturn can raise concerns if it is not orderly — as in the present case — and to the extent easing yields reflect reduced global-growth expectations.

In a related move, the 30-year Treasury yield registered record lows last week, and has extended the breakdown. Also see the Jan. 17 review and the Jan. 28 review.

Looking elsewhere, the U.S. Dollar Index has recently taken flight, also rising amid a safe-haven trade.

The steep February breakout places the dollar at nearly three-year highs, punctuating a massive spike from trendline support.

Generally speaking, easing yields make the dollar comparably less attractive than its peers, sending it lower. In the current case, the dollar has strengthened amid plunging yields, signaling that safe-haven demand is influencing price action.

Meanwhile, the SPDR Gold Shares ETF GLD, -0.61%  — profiled last week — has also taken flight, knifing to seven-year highs.

Fundamentally, the U.S. dollar and gold are conventionally inversely correlated. As the dollar rises, gold falls, and vice versa.

So here again, the tandem dollar and gold breakouts signal a flight-to-safety trade.

Technically, gold is near-term extended, and due to consolidate, though it continues to rise amid a firmly-bullish longer-term backdrop. Consider that the December and February rallies both marked massive two standard deviation breakouts.

Charting U.S. sector damage — traditional sector leaders under siege

Moving to U.S. sectors, Monday’s market plunge has inflicted sub-sector damage. Quickly consider that traditional sector leaders — the transports, financials and technology sector.

To start, the iShares Transportation Average ETF IYT, -2.73%  has plunged to four-month lows. The downturn punctuates a failed test of trendline resistance.

In the process, the group has gapped under its 200-day moving average, currently 188.80.

As always, the 200-day is a widely-tracked longer-term trending indicator. Though it’s currently flatlining — signaling an absence of trend — the single-day downdraft raises a question mark. Tactically, the transports’ prevailing backdrop supports a bearish-leaning bias pending a reversal back atop the former range top (195), an area matching the top of the gap.

Meanwhile, the Financial Select Sector XLF, -1.86%  has reached two-month lows, gapping firmly under its 50-day moving average.

The downturn has been fueled by increased volume, and punctuates a failed test of the range top. (The group’s fractional mid-month record high has marked a false breakout of sorts.)

Tactically, Monday’s close (29.77) matched the range bottom (29.75) and the prevailing retest should be a useful bull-bear gauge. A violation of this area would mark a “lower low” more firmly signaling a bearish intermediate-term bias.

Finally, the Invesco QQQ Trust QQQ, -1.17%  tracks the Nasdaq 100 Index and offers a large-cap technology sector proxy.

As illustrated, the QQQ has reversed sharply from record highs, gapping under trendline support and the breakout point. A swift reversal atop the trendline (226) — which looks unlikely — would neutralize the downdraft.

Conversely, the 50-day moving average, currently 220.87, is followed by the late-January low (217.18). An eventual violation would punctuate a “lower low” more firmly signaling a bearish intermediate-term bias.

Collectively, the massive single-day market downdraft has inflicted U.S. sub-sector damage, and the pending downside follow-through, or lack thereof, will likely add color.

Editor’s Note: This is a free edition of The Technical Indicator, a daily MarketWatch subscriber newsletter. To get this column each market day, click here.

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.