June stock market bottoms seen again as S&P 500 loses control above 3,900

Stock market bears maintained the upper hand last week, with the S&P 500 ending Friday below a crucial chart support level, prompting technical analysts to warn of a potential test of its bottom in June.

“Over the past three years, the level of [S&P 500] with the most traded volume of 3,900. It closed below that on Friday for the first time since July 18, which we believe opens the door to June lows” near 3,640, Jonathan Krinsky, chief market technician at BTIG, said in a Sunday note (see chart below) .

BTIG

S&P 500
SPX,
-0.72%

ended friday at 3,873.33 — down 0.7% on the session and 4.8% for the week to its lowest close since July 18. That left the index up 5.7 percent from its June 16 closing low of 3,666.77. The S&P 500 hit an intraday low for the selloff at 3,636.87 on June 17, according to FactSet.

The Dow Jones Industrial Average
DJIA,
-0.45%

fell 4.1% last week to close Friday at 30,822.42, while the Nasdaq Composite
comp,
-0.90%

posted a 5.5% weekly decline to 11,448.40.

A return to the June lows likely won’t be a straight line, Krinsky writes, but the lack of noticeable “panic” so far in the Cboe Volatility Index
VIX,
+0.11%

futures curve and the lack of a decline to more extreme oversold conditions as measured by the monthly relative strength index do not bode well, he said.

Other analysts noted the lack of a sharper rise in the VIX, often called Wall Street’s “fear gauge.” The options-based VIX ended Friday at 26.30 after trading as high as 28.42, above its long-term average near 20 but well below the panic levels often seen near market lows above 40.

Stocks rebounded sharply from June lows that sent the S&P 500 down 23.6% from its Jan. 3 record high of 4,796.56. Krinsky and other chart watchers had noted the S&P 500 in August completed a more than 50% retracement of its decline from the January high to the June low, a move that through the past was not followed by a new bottom.

However, Krinsky at the time cautioned against chasing the bounce, writing on August 11 that “tactical risk/reward looks bad for us here.”

Michael Cramer, founder of Mott Capital Management, had warned in a note last week that a close below 3,900 would create a test of support at 3,835 “where the next big gap to fill the market is.”

Stocks fell sharply last week after Tuesday’s consumer price index for August showed inflation runs hotter than expected. The data bolstered expectations that the Federal Reserve would deliver another big hike of 75 basis points, or 0.75 percentage point, to the federal funds rate, with some traders and analysts saying ion an increase of 100 basis points when politicians wrap up a two-day meeting on Wednesday.

Overview: The Federal Reserve is ready to tell us how much “pain” the economy will take. Still, it won’t hint at a recession.

The market’s bounce from its June lows came as some investors became more confident in the Goldilocks scenario, in which the Fed’s policy tightening would lead to inflation in the relatively short term. For the bulls, the hope was that the Fed would be able to “pivot” from rate hikes, preventing a recession.

The stubborn inflation reading prompted investors to raise their expectations of where they think interest rates will peak, fueling fears of a recession or sharp slowdown. Aggressive tightening by other major central banks has raised fears of a broad global slowdown.

Look: Can the Fed tame inflation without crashing the stock market? What investors need to know.

Hear from Ray Dalio at The best new ideas in the money festival on September 21 and September 22 in New York. The hedge fund pioneer has strong views on where the economy is headed.

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