Stocks are recovering mildly Wednesday, but if they fall much further technicals suggest bulls could be in for some serious pain in the weeks ahead before indexes ultimately stabilize.

The S&P 500 Index broke its bullish year-long uptrend this week, and now chart watchers say it needs to stay above its 200-day moving average, which currently sits around 4,204. Technical traders use that moving average to assess whether the longer-term trend is up or down.

If the S&P 500 fails to hold above its 200-DMA it will be a sign that the market is poised for another leg lower, said Andrew Thrasher, a technical analyst and portfolio manager at Financial Enhancement Group. The index has stayed over that level for 137 sessions through Tuesday, the longest run since the post-pandemic surge in June 2020.

“Below 4,200 creates an air pocket for the index because there’s not many support levels left for buyers to grasp onto until down to around 3,900 where the March lows are,” Thrasher said.

However, he added that bulls would have the upper hand once again if the S&P 500 tops the June low of around 4,350.

Taking Stock of Volume

Chart watchers want to see moves supported by broad volume rather than just a handful of companies pushing major indexes higher. The Arms Index, also called the Short-Term Trading Index, or TRIN, compares the number of advancing and declining stocks to advancing and declining volume.

Readings above 2.0 in the gauge are a sign that investors are dumping equities, while those below 0.5 suggest there’s more demand for stocks, according to Mark Newton, head of technical strategy at Fundstrat Global Advisors. Following Tuesday’s selloff, it sat at 0.7, meaning another bout of selling may be near before the market has a final washout. He’s watching to see if the S&P 500 stays above 4,165 based on a number of different technical metrics to provide stability.

Even as the S&P 500 is still up more than 10% since early January, 54% of its members are down for the year, as the outsized influence of tech giants masks weakness in utilities and telecom stocks. The cap-weighted S&P 500 has outperformed its equal-weighted peer, which makes little distinction between companies like Inc. and Assurant Inc., by nearly 13 percentage points in 2023. If the year ended now, it would be the widest gap since the dot-com mania in 1998.

Momentum Signals
That said, there are signs that stocks have become oversold. The S&P 500’s 14-day relative strength index slid below the key 30 level on Tuesday for the first time since September 2022. Just 8% of the index’s shares are above their 50-DMAs through Tuesday’s close, another sign that investors may have turned overly bearish.

Chart watchers deem stocks as oversold when prices fall so far, so fast that there is little room for them to move even lower. But more improvement in technical signals like breadth and volume are needed to confirm that the latest bout of market pain has passed. About 35% of stocks in the S&P 500 traded above their 200-DMAs. Typically, that figure would need to drop below 20% for traders to believe stocks have capitulated, according to Ari Wald, senior analyst at Oppenheimer.

This article was provided by Bloomberg News.