The S&P 500 ended above a chart level on Friday, providing a dose of encouragement to stock market bulls, suggesting that the bottom of the U.S. bear market is in place, although technical analysts warned that it may not be a signal to go all- in on the shares.
The S&P 500 SPX, +1.73% rose 1.7% on Friday to close at 4,280.15. A finish above 4,231 would mean the large-cap benchmark has recovered — or retraced — more than 50% of its decline since Jan. 3’s record close of 4,796.56.
“Since 1950, there has never been a bear market rally that exceeded a 50% correction and then made new cycle lows,” Jonathan Krinsky, chief market technician at BTIG, said in a note earlier this month.
Stocks rose across the board on Friday, with the S&P 500 posting its fourth straight weekly gain. The Dow Jones Industrial Average DJIA, +1.27% advanced more than 420 points, or 1.3%, on Friday and the Nasdaq Composite COMP, +2.09% rose 2.1%. The S&P 500 tried to complete a correction in Thursday’s session when it traded as high as 4,257.91, but gave up gains to end at 4,207.27.
Krinsky, in an update on Thursday, noted that a breach of the intraday level did not bring it down, but cautioned that a close above 4,231 would still leave him cautious about the near-term outlook.
“Since the correction is based on a close, we would like to see a close above 4,231 to trigger this signal. Regardless of whether that happens, however, the tactical risk/reward looks bad to us here,” he wrote.
What’s so special about a 50% correction? Many technical analysts pay attention to what is known as the Fibonacci ratio, attributed to a 13th century Italian mathematician known as Leonardo “Fibonacci” of Pisa. It is based on a sequence of integers where the sum of two adjacent numbers is equal to the next largest number (0,1,1,2,3,5,8,13, 21…).
If a number in the series is divided by the next number, such as 8 divided by 13, the result is close to 0.618, a ratio that has been called the Golden Mean because of its prevalence in nature in everything from seashells to ocean waves to human body proportions. Back on Wall Street, technical analysts see key correction targets for a significant bottom-to-significant high rally at 38.2%, 50% and 61.8%, while the 23.6% and 76.4% corrections are seen as secondary targets .
A push above the 50% retracement level during the recession on Thursday may have contributed to a round of selling, Jeff de Graaff, founder of Renaissance Macro Research, said in a Friday note.
He noted that the correction matched a 65-day high for the S&P 500, offering another indication of an improving bear market trend as it represented the highest level since the last rolling quarter. The 65-day high is often seen as the default signal for commodity trading advisors, not only in the S&P 500, but also in commodity, bond and foreign exchange markets.
“This level coincided with the 50% bear market correction level,” he wrote. “Essentially, it forced one group’s hand to cover shorts (CTAs) while giving another group (Fibonacci followers) an excuse to sell” on Thursday.
Krinsky, meanwhile, cautioned that previous 50% corrections in 1974, 2004 and 2009 saw decent shakeouts shortly after clearing that threshold.
“Furthermore, as the market welcomes ‘peak inflation,’ we are now seeing a quiet resurgence in many commodities and bonds continue to weaken,” he wrote Thursday.
See: Stock market euphoria meets bond market pessimism as ‘strange week’ ends
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