After U.S. stocks suffered a sharp, Black Friday selloff following the discovery of a fast-spreading variant of the coronavirus that causes COVID-19, chart watchers are attempting to gauge just how deep the pullback could get.
“While we have been looking for a pullback, it’s difficult to forecast how quickly it will play out,” said veteran technical analyst Mark Arbeter of Arbeter Investments, noting that, often, “panic downside moves accelerate or shorten the length of the pullback” while also potentially erasing “obscene” positive sentiment levels that have accompanied the rally.
While it remains unclear how transmissible or deadly the new variant discovered in South Africa will prove to be, investors dumped equities and other assets perceived as risky on Friday, piling into safe-haven assets such as Treasurys and gold.
The S&P 500 SPX dropped 106.84 points, or 2.3%, at 4,594.62, its lowest finish since Oct. 27, leaving it a little more than 2% off its record close from Nov. 18.
The Dow Jones Industrial Average DJIA, -2.53% fell more than 1,000 points at its session low and ended the day down 905.04 points or 2.5%, for its biggest one-day percentage price and percentage drop of 2021. The Nasdaq Composite COMP, -2.23% fell 2.2%.
Holiday trading conditions were blamed for amplifying market moves; equity trading ended at 1 p.m. Eastern after U.S. markets were closed Thursday for the Thanksgiving Day holiday.
In the chart below, Arbeter shows that key support levels for the S&P 500 are clustered together.
“The probability that the market stops in an area with multiple supports close together should in theory be higher than some random spot on the chart. Although, this does not always work, which keeps us on our toes,” Arbeter wrote.
The S&P 500 dipped as low as 4,585.43 and closed below the first support level Arbeter identified at 4,634 — a 23.6% retracement of the index’s rally since October. It also took out the next layer of support at 4,600, the middle “Bollinger Band” on the daily price chart. Bollinger Bands plot standard deviation from an asset’s simple moving average.
Below that, the first cluster of support levels is found at 4,570, the 50-day exponential average; 4,566, the 38.2% retracement of the rally; and 4,550, a previous high from early September.
The second cluster begins at 4,525, the 50-day simple average, he said, and is followed at 4,512, a 50% retracement of the rally; 4, 500, the middle Bollinger Ban on the weekly price chart, and 4,490, the 21-week exponential average.
After that, trend line support drawn off the lows since March stands at 4,460, he said.
“The stock market took a left hook on Black Friday and wobbled into the weekend, Arbeter said near the close, in emailed comments. “They say markets don’t bottom on Friday, so many are looking for a low early next week,” with weekend news headlines set to be a big determinant of Monday’s price action.