Investors have now lost $1.8 trillion in September when S&P 500 Index fell below its 50-day ma. One of the concerns developing into the recent correction is the deterioration in the market breadth over the past two weeks. On Monday, the broad market breadth reading was horrendous as roughly 89.5% of the NYSE volume or just under the all-important 90% threshold were down. After the SPX 1.7% sell-off on Monday and the subsequent 0.08% decline today, only 151 stocks or 30% of the S&P 500 stocks are trading above their 50-day moving averages. That would imply nearly 70% of SPX stocks are in short-term flat-to-downtrends.
On an intermediate-term basis, SPX is still trading comfortably above its 200-day ma (4,109.50). However, the number of S&P 500 stocks trading above their 200-day ma has declined to 327 stocks. Nearly 65% of S&P 500 stocks are trading above their intermediate-term moving averages, which is the lowest reading since last October 2020.
What do these conflicting technical signals mean for the U.S. stock market?
The violation of the 50-day ma (4,435.50) in SPX, the large gap-down, and the trendline breakdown yesterday are near-term negative technical developments. On top of these bearish technical conditions, the weakening of the SPX’s near-term market breadth measure (% of stocks above 50-day ma) warns at a near-term technical basing effort is necessary to repair the recent technical damages incurred.
Since SPX is trading above its pivotal 200-day ma (4,109.50) and the intermediate-term market breadth measure (% of stocks above 200-day ma) remains favorable, a constructive technical basing effort can lead to the resumption of the primary uptrend.
The next few days to a couple of weeks will be crucial, coinciding with the FOMC meeting (9/22/21) and the end of the third quarter window dressing.
SPX must not violate its 9/20/21 low (4,405.91) and the 38.2% retracement (4,281) from the March to September 2021 rally. The near-term market breadth trend also needs to firm over the next few days/weeks. Second and most importantly, SPX must clear above its 9/20/21 gap-down, trendline, and the 50-day ma breakdown (4,403-4,435.5). Only then will this convince traders and investors to return to the marketplace.
Above 4,436 signals the next SPX rally back to retest its 9/2/21 all-time high (4,545.85). Below 4,281-4,306 warns of a deeper correction that can bring SPX to as low as 4,109.5-4,118 (200-day ma and the 61.8% retracement from Mar-Sep 2021 rally).
In the meantime, the SPX Index remains a work in process with the potential for a technical base between 4,281-4,306 and 4,403-4,436, near-term.