Technical data

Stock market bulls target technical signal for further gains

The Charging Bull statue, also known as Wall St. Bull, is pictured in the Financial District of New York’s borough of Manhattan, New York, U.S., September 9, 2020. REUTERS/Carlo Allegri/

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NEW YORK, Aug 12 (Reuters) – Some stock bulls are watching a technical indicator for whether a summer rebound in U.S. stocks will continue.

The S&P 500 (.SPX) is up 15% from its mid-June low, a rally that gathered further momentum after US inflation data on Wednesday showed prices at the consumption were unchanged for July. This bolstered the case for the Federal Reserve to end its market-killing rate hikes sooner than expected.

The surge in stocks, which delivered the S&P’s best eight-week period in more than a year, brought the index into view of a 50% retracement of its loss in the bear market.

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Traders are watching the 4,231 level for the S&P 500. Reaching this would mean the benchmark will have recouped half of the losses recorded since falling from its January high.

“In my studies, pulling back 50% is bullish,” said Nargis Motorwala, an independent trader based in the San Francisco Bay Area.

But the lack of a decent pullback for the S&P 500 in recent weeks warrants treating the signal with caution, she said.

To trigger the signal, the S&P 500 must close above 4,231, Jonathan Krinsky, chief market technician at BTIG, said in a note.

While this doesn’t promise more gains, it could mean the bear market has bottomed out if history is any guide.

“Since World War II, each time the S&P has recovered 50% of the bear market price decline, while the 500 may have retested the previous low, it has never set a lower,” said Sam Stovall, chief investment strategist at CFRA Research.

No bear market since WWII has ever hit new lows after retracing 50% of its losses

A close above this level does not necessarily signal the end of short-term weakness in equities.

“The prior 50% retracements in 1974, 2004 and 2009 all had decent shakes shortly after crossing that threshold,” Krinsky said.

The Nasdaq bear market from 2000 to 2002 saw several rallies above 20% to give way to lower lows

The big rally in stocks over the past few weeks, particularly for beat-tech and other growth names, lifted the Nasdaq Composite (.IXIC) more than 20% above its recent low, raising hopes for a brief bear market.

Opinions differ on how to spot an expiring bear market or a new bull market. Some define a bull market as a 20% rise from a previous low. Others say investors can only be sure of a new bull market once an all-time high has been reached. Read more

Fierce stock market rallies can occur in a broader bear market.

For example, the 2000-2002 bear market for the Nasdaq saw several rallies above 20%: all but one faded to make way for lower lows for the index.

The Fear Index offers hope to stock bulls

Stock bulls, however, have something else to celebrate.

The strong rally in the US stock market crushed measures of investor anxiety to multi-month lows, with the Cboe Volatility Index (.VIX) posting its first close below the 20 level in nearly 4 months on Wednesday.

The VIX, an options-based indicator that reflects the stock market’s demand for downside protection, recently settled just above the 20 mark, a level typically associated with moderate investor concern about the outlook. short term.

The decline in the VIX coincides with a marked decline in daily stock market fluctuations over the past few weeks and therefore bodes well for the market.

Since 1990, on average, the S&P 500 has gained 0.11% each day the VIX closed below the 20 level, compared to an average drop of 0.08% on days the index closes above the bar. of the 20, according to a Reuters analysis. .

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Reporting by Saqib Iqbal Ahmed; edited by Megan Davies and Richard Chang

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