Look Out Below! My Downside Targets For The S&P 500 As Stocks Remain Guilty Until Proven Innocent

If you’ve been fighting the mounting bearish evidence up until this week, then perhaps the distribution we’ve witnessed here in late October has been enough to convince you otherwise. It was easy for some to write off the negative rotation in key leadership groups, and maybe you flat-out ignored the head and shoulders top on the S&P 500 chart, but at this point, the weight of the evidence appears to have rotated clearly to the bearish side.

In a bullish phase, I like to think of the market as “innocent until proven guilty.” You assume that the uptrend of higher highs and higher lows will continue until some catalyst causes a change of character on the chart.

In a bearish phase, stocks become “guilty until proven innocent,” and investing involves less of a “do I think the market will go lower” question and more of a “what would I need to see to turn bullish” discussion.

So what’s next for the S&P 500 now that we all agree that the market is guilty until proven innocent? Today, we’ll identify three potential downside targets for the S&P 500 chart using price patterns, Fibonacci retracements, and traditional support and resistance levels. 

What is your downside objective for the S&P 500? Watch this, and then let me know!

Downside Target #1: SPX 4050

Now that the S&P 500 has broken below its 200-day moving average, what’s the next most obvious area for potential support? Let’s point out that when the SPX broke down through the 200-day, it also pushed below the first Fibonacci retracement level around 4180. This level represented a 38.2% drop from the July 2023 high down to the October 2022 low, and now it’s firmly in the rearview mirror.

Following this Fibonacci methodology, the 50% level would be next. That suggests 4050 as a reasonable downside target, which happens to be only about 70 points below Friday’s close!

Remember the head and shoulders top we mentioned earlier? The minimum downside objective for that classic price pattern would come in right around 4080, which means we have a “confluence of support” where multiple technical approaches all coalesce around the same level.

Downside Target #2: SPX 3920

What if the 4050 level doesn’t hold? In that case, we can follow this same Fibonacci progression and look further down to the 61.8% retracement level. This comes just below 3920 and would represent about a 15% drop in absolute terms from the July 2023 high.

The 61.8% retracement level often represents a “point of new return” level, as a break below would suggest a full retracement of the original move. That would mean a further drop to the October 2022 low around 3500. But given the fact that there is no other real support level around 3920, I’m inclined to consider this a secondary level for now.

Downside Target #3: SPX 3800

This brings up the most severe scenario, at least as severe as we’re able to consider at this particular juncture. What if 4050 and 3920 come and go, and the market is still in a decline? That’s when 3800 will become the new area of interest.

Given what I’ve seen so far from stocks, including bearish Dow Theory confirmation, breadth deterioration, and just plain old price declines, I’m fairly confident that 3800 is a reasonable downside objective. This would take us down almost 18% down from the July 2023 high, and about 21% off of all-time highs in January 2022.

You’ll see how 3800 lines up pretty well with the major lows in March 2023 and December 2022, but you may also notice the purple dashed line around 3815. This line shows a 38.2% retracement from the January 2022 high back down to the COVID low in March 2020. That’s why SPX 3800 has been on our radar for quite some time, and why we feel a remarkable symmetry would come to pass with an S&P 500 drop back to this same 3800 level.

Mindful investors know that improving your situational awareness involves a consistent process of analyzing both leading and lagging indicators to anticipate, identify, and confirm turning points.  By focusing in on the downside targets we’ve discussed here, you may just find that the equity markets are starting to actually make sense here in late 2023!

RR#6, Dave

PS- Ready to upgrade your investment process?  Check out my free behavioral investing course!

David Keller, CMT Chief Market Strategist StockCharts.com

David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis.  He is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness.  He is a Past President of the Chartered Market Technician (CMT) Association and currently serves on the CMT Curriculum and Test Committee.  David was formerly a Managing Director of Research at Fidelity Investments in Boston as well as a technical analysis specialist for Bloomberg in New York.  You can follow his thinking at MarketMisbehavior.com, where he explores the relationship between behavioral psychology and the financial markets.  

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity