The S&P 500 index ended above a chart level on Friday that provided a dose of encouragement to stock-market bulls who argue that the US bear-market is bottoming, although technical analysts cautioned that this may not signal all the way forward in equities.
Friday closed up 1.7% at 4,280.15. A finish above 4,231 meant the large-cap benchmark recovered — or returned — more than 50% of its decline from a record finish at 4796.56 on Jan. 3.
“There hasn’t been a bear market rally since the 1950s that surpassed the 50% retracement and then made new cycle lows,” Jonathan Krinsky, BTIG’s chief market technician, said in a note earlier this month.
Friday and the Nasdaq Composite advanced more than 420 points, or 1.3%
Pink 2.1%. The S&P 500 attempted to complete a retracement 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 an intraday breach of the level wouldn’t cut it, but cautioned that a close above 4,231 would still make him wary of the near-term outlook.
“Because the retracement is based on the close, we would like to see a close above 4,231 to trigger that signal. Whether that happens or not, the strategic risk/reward here looks bad to us,” he wrote.
What’s so special about a 50% retracement? Many technical analysts attribute the so-called Fibonacci ratio 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 highest number (0,1,1,2,3,5,8,13, 21…).
If one number in the sequence is divided by the next number, for example 8 divided by 13, the result is close to 0.618, a ratio called the golden mean because of its prevalence in nature, from the ratio of seashells to ocean waves. The human body. Back on Wall Street, technical analysts see key retracement targets for rallies from significant lows to significant peaks at 38.2%, 50% and 61.8%, while retracements of 23.6% and 76.4% are seen as secondary targets.
A push above the 50% retracement level during Thursday’s decline could itself contribute to a round of selling, Renaissance Macro Research founder Jeff DeGraff said in a note on Friday.
I note that the retracement, relative to the 65-day high for the S&P 500, is another indication of an improving trend in a bear market as it represents the highest level of the last rolling quarter. A 65-day high is often seen as a default signal for commodity trading advisors, not only in the S&P 500 but also in the commodity, bond and forex markets.
“That level coincidentally coincided with the 50% retracement level of the bear market,” he wrote. “In essence, it forced one group’s hands to cover shorts (CTA) while simultaneously giving another group (Fibonacci followers) an excuse to sell,” Thursday.
Krinsky, meanwhile, cautioned that previous 50% retracements in 1974, 2004 and 2009 saw only modest bounces after clearing that threshold.
“Furthermore, as markets cheered ‘peak inflation,’ we now see a quiet recovery in many commodities, and bonds continue to weaken,” he wrote Thursday.