Why Stock Market Bulls Cheer With S&P 500 Closing Above 4231

The S&P 500 finished Friday above the chart level that provided a dose of encouragement to stock market bulls arguing that the bottom of the US bear market is inside, although technical analysts cautioned that it may not be a signal of intervention in stocks.

S&P 500 SPX Index,
+ 1.73%
On Friday, it rose 1.7% to close at 4280.15. A finish above 4,231 means the big stock index has recovered – or rebounded – more than 50% of its decline from a record January 3 finish at 4,796.56.

“Since 1950, there has been no bear market rally that has crossed the 50% retracement level and subsequently moved to new cycle lows,” Jonathan Krinsky, chief market technical officer at BTIG, said in a note earlier this month. .

Stores rose across the board on Friday, With the S&P 500 booking a fourth consecutive weekly gain. Dow Jones Industrial Average DJIA,
+ 1.27%
It advanced more than 420 points, or 1.3%, on Friday and the Nasdaq Composite,
+ 2.09%
It rose 2.1%. The S&P 500 index attempted to complete the correction in the Thursday session, when it traded as high as 4257.91, but gave up gains to end at 4207.27.

Krinsky, in Thursday’s update, noted that the daily breakout of the level is not cutting it, but cautioned that a close above 4231 still leaves him cautious about the near-term outlook.

“Since the retracement is close based, we would like to see a close above 4231 to trigger this signal. Whether or not that happens, the tactical risk/reward looks bad to us here.”

What characterizes the 50% retracement? Many technical analysts pay attention to what is known as the Fibonacci ratio, attributed to the 13th century Italian mathematician known as Leonardo “Fibonacci” of Pisa. It is based on a series of integers where the sum of two adjacent numbers equals the next higher number (0,1,1,2,3,5,8,13,21…).

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If a number in the sequence is divided by the next number, say 8 divided by 13, the result approaches 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 proportions of human body. Back on Wall Street, technical analysts see major correction targets for the rally from a major low to an important high at 38.2%, 50% and 61.8%, while the 23.6% and 76.4% retracements are secondary targets.

The rally above the 50% retracement level during Thursday’s recession may have contributed to the sell-off itself, Jeff Degraaf, founder of Renaissance Macro Research, said in a note on Friday.

He noted that the rebound coincides with the 65-day high of the S&P 500, which provides another indication of the improving trend in a bear market where it marks the highest level in the last trading quarter. The 65-day high is often seen as a hypothetical signal for commodity trading advisors, not only in the S&P 500 but in the commodity, bond and forex markets as well.

He wrote: “This level coincidentally coincides with the 50% retracement level of the bear market.” “In essence, one group’s hand was forced to cover the shorts (CTAs) while simultaneously giving another group (Fibonacci followers) an excuse to sell,” on Thursday.

Meanwhile, Krinsky warned that previous 50% recoveries in 1974, 2004 and 2009 all experienced good tremors soon after this threshold was crossed.

“Furthermore, while the market has been chanting ‘peak inflation’, we are now seeing a quiet recovery in many commodities, and bonds continue to weaken,” he wrote on Thursday.

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