Market Sentiment Teeters As US Indices, Including S&P 500, Break Key Supports: Next Levels To Watch

All three leading U.S. stock indices — the S&P 500, Nasdaq 100, and Russell 2000 — have simultaneously breached a crucial technical support level this week.

The break below the widely-watched 50-day moving average, a technical indicator that gauges the average closing price over the past 50 trading sessions, is setting off alarm bells for investors, as the move is typically interpreted as an early signpost indicating an impending shift in market trends.

The S&P 500, Nasdaq 100, and Russell 2000 indices had experienced remarkable growth of 20%, 44%, and 14% respectively, from the beginning of the year to the end of July. However, the narrative took a U-turn in August, with a pullback that was underscored by a series of short-term bearish signals.

Chart: Three Of Four Major U.S. Stock Indices Fall Below 50DMA

Small-cap stocks, as represented by the iShares Russell 2000 ETF IWM, have taken a staggering plunge of over 6% since the onset of the month. Meanwhile, the tech sector, embodied by the Invesco QQQ Trust QQQ, and the behemoth stocks of the 500 largest companies, as monitored by the SPDR S&P 500 ETF Trust SPY, witnessed more measured retreats, down by 5% and 3% respectively.

The numbers reflect the stark reality of the weak momentum, with the Russell index bearing negative closures in 10 out of 12 sessions so far this month, and both the S&P 500 and Nasdaq grappling with nine negative sessions within the same time frame.

Read also: Understanding Simple Moving Averages

All three indices are in their third straight week of declines, a synchronized retreat last seen during the bear market of 2022.

What traders resorting to technical analysis would have certainly noticed is that these three indices have also simultaneously broken below the critical bastion of the 50-day moving average, leaving the Dow Jones Industrial Average the exception for now. The S&P 500 and the Nasdaq 100 had been trading above this important support since mid-March, while small caps had been doing so since early June.

S&P 500: Key Levels To Watch Next

Focusing on the S&P 500, it is presently hovering around the 4,400-point mark, a crucial level that not only acted as solid support in the early days of July but also constitutes the 23.6% Fibonacci retracement level between the year’s highs and lows.

In case of further intensification in the pullback, support levels of note are located at approximately 4,296 (representing the 38.2% Fibonacci retracement) and 4,200 (equivalent to the 50% Fibonacci retracement and the June lows). If the latter is reached, the S&P 500 will have lost roughly 10% since its July highs, confirming a market correction.

Chart: S&P 500 Index – Key Moving Average And Fibonacci Retracement Analysis

Worst Performers Month To Date

The S&P 500’s worst performers month to date, as of the Aug. 16 close, included:

• SolarEdge Technologies SEDG down 33%.
• Generac Holdings Inc. GNRC down 29%.
• Etsy, Inc. PYPL down 27%.

Similarly, within the Nasdaq 100, the weakest performers month to date, as of Aug. 16 close, were:

• Fortinet Inc. FTNT down 25%.
• Datadog, Inc. DDOG down 22%.
• PayPal Holdings, Inc. PYPL down 21%.

As for the Russell 2000, the underperformers month to date, as of Aug. 16 close, were:

• Design Therapeutics, Inc. DSGN down 74%.
• Origin Materials, Inc. ORGN down 72%.
• Cano Health, Inc. CANO down 71%.

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