Stocks took it on the chin last week, slicing through critical support at 4,480 on the S&P 500. All told, this sell-off has erased six months’ worth of gains bringing stocks back to the levels of last August 2021.
The big question for investors this week is: where do we go from here?
First and foremost, the market is deeply oversold. The S&P 500 is well below the lower Bollinger Band on its daily chart. The market is also showing the lowest relative strength index (RSI) reading since the March 2020 crash. Yes, the market is as oversold as it was during the first wave of the global pandemic.
This suggests a bounce is coming. It is highly unlikely stocks go straight down from here. Instead, we are likely to get a rally into this week’s FOMC on Wednesday, with the S&P 500 revisiting former support, if not breaking a little above it. I’ve drawn this out on the chart below.
What happens there is key. If stocks hold those gains, then this recent drop was likely just a plain vanilla sell-off to take out the excess froth in the markets.
However, if, instead of holding those gains, stocks roll over and begin falling again, then we are likely at the start of a more pronounced breakdown and possibly a new bear market.
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Best Regards