The Stock Market Is Flirting With Trouble. Watch These Key Price Levels. -- Barrons.com

By Jacob Sonenshine

Stocks are taking a beating after a weak GDP report and worries about tech, following Meta Platforms' disappointing revenue and spending outlook. While buying the dip may be temping, the declines may have to play out more before the pain is over.

All three major U.S. indexes were solidly in the red Thursday morning, with the S&P 500 down 1.3%. Meta, down 12%, was dragging other tech names lower, including Alphabet, Amazon.com and Trade Desk. The weak GDP report was also pulling down other sectors, including consumer, retail and financials.

Some of it may reflect valuations that were simply too stretched. The indexes had become increasingly expensive after months of gains, all while concerns about consumer spending and economic growth linger in the face of stubbornly high inflation and a Federal Reserve that's unlikely to lower interest rates soon.

Now, the S&P 500 is hovering just above a key technical support level. It's hovering around 5,000, trading just above 4,967, a key support level.

Also worrisome is that the index is firmly below its 50-day moving average of 5,121. When it dips below that average, it often goes on to drop to its 200-day moving average, according to FactSet data. This happened in the second half of 2023, the first half of 2023, and the first half of 2022.

The current 200-day moving average is 4,686. Falling to that level would bring the index down by a bit more than 6%.

"A second quarter test of the S&P 500's 200-day moving average... is likely before the correction finishes," writes Evercore strategist Julian Emanuel.

The good news is that buyers have consistently come in near the 200-day moving average to prop the index up since early 2023. As long as the economy avoids recession, that should happen again. But expect more declines in the very near-term.

A "short-term bearish formation," which essentially means more declines for the next few weeks, remains a distinct possibility, writes Frank Cappelleri, founder of technical research firm CappThesis.

Wait patiently. The market is reconciling with real risks right now.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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April 25, 2024 11:14 ET (15:14 GMT)

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