Stocks Face ‘Critical Tipping Point’ as Key Thresholds Tested

(Bloomberg) — A suddenly turbulent US equity market has traders studying technical charts for clues on where the latest bout of selling might stall out.

Doubts around whether the billions of dollars being invested in artificial intelligence will pay off, combined with still-lofty stock valuations sent the S&P 500 Index (^GSPC) down to 6,720.32 on Thursday, the lowest level in two weeks. From here, the 50-day moving average of 6,665 looms as a major line of defense, chart watchers say.

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A drop below that level would be a sign of “technical cracks emerging,” according to Tyler Richey, a technical analyst and editor of the Sevens Report. Conversely, the gauge’s return to 6,748.10 — its 21-day moving average — would likely reignite risk-on momentum, he added.

While investors rarely rely on technical patterns in isolation, charts offer useful insight on potential inflection points in the market. Chart analysis has taken on more prominence now that the government data has gone dark during the shutdown, earnings season is past its peak and questions continue to swirl around the Federal Reserve’s policy path.

The S&P 500 just had its third drop of at least 0.99% in the past six sessions and is now down 2.5% from its last record. The Cboe Volatility Index has jumped toward 20.

“This a critical tipping point,” Richey said.

Traders headed for exits on Thursday after data from Challenger, Gray & Christmas Inc. showed companies had announced the most job cuts for any October in more than two decades as AI-related cost cutting accelerates. Worries about valuations in technology high-flyers reaching unsustainable levels added to the uncertainty. The Bloomberg Magnificent Seven Price Return Index dropped 2% on Thursday in its third such decline in six sessions.

Before the 50-day moving average comes into play, the next critical line for chart watchers is the round-number 6,700. To SpotGamma founder Brent Kochuba, high open interest in S&P 500 contracts with that strike may provide a much needed support to the market, at least in the short run. The heavy weight of options at a particular level can help pin the market at certain points as traders scoop up contracts to buy insurance against a market drop.

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JPMorgan Chase & Co. (JPM) strategists say the 6,740 – 6,800 range is an important technical level for the 500-member gauge, with a bigger, medium-term support at 6,640. A break below that reading would be a materially bearish signal, strategists including Jason Hunter said.

To Maxwell Grinacoff, head of US equity derivatives research at UBS, hedging activity has been on the rise in the past month. He pointed that the VIX has been hovering near the crucial 20 level since mid-October. On Thursday, a gauge of expected price swings in the Nasdaq 100 Index (VXN) climbed toward 25.

The selloff comes as earnings season winds down and as investors become reliant on private data amid a dearth of economic figures due to the ongoing government shutdown. The next market-moving catalyst will likely be Nvidia Corp.’s (NVDA) earnings on Nov. 19. Sign up for the Yahoo Finance Morning Brief By subscribing, you are agreeing to Yahoo's Terms and Privacy Policy

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“Risks abound and investors are hedging that,” Grinacoff said. “I think investors are well aware of the increase in fragility of the market.”

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