3,800 key to the S&P 500 as a hurdle to watch

The US stocks are still in bounce mode after the S&P 500 index fell to its lowest since December 2020, but many chart watchers are unconvinced that the uptick will prove to be more than a bear market rebound.

The 3,800 level on the index, which has so far proven to be stiff resistance, is in focus.

In a Thursday note, Tom Essaye, founder of Sevens Report Research, said 3,800 has become a new ceiling for the S&P 500 since the beginning of last week, as sellers have repeatedly stepped in and overwhelmed the tentative, weakhanded bids.

The S&P 500 SPX was up 0.1% at 3,763 in choppy trade Thursday afternoon and on track for a 2.4% weekly gain. The Dow Jones Industrial Average DJIA was down around 90 points, or 0.3%, on track for a 1.7% weekly advance.

Essaye observed that the price action around 3,800 is in keeping with the large-cap benchmark s bear market slide this year.

In early February, the S&P 500 repeatedly tested the 4,600 level before a 10% peak-to-trough drop to its late-February low, he recalls. After a March bounce, 4,500 served as a ceiling, with the market's early April failure setting the stage for another 10% decline, Essaye said. In late April, 4,300 became the new resistance, with the market failing to overcome it several times before falling more than 11% into the latter half of May. In early June, 4,150 became resistance, with failure to overcome leading to a 13% peak-to-trough decline.

Now, whether the market is poised to fall another 10% from this new resistance level, which would be down towards the 3,400 area, remains to be seen and a squeezy leg higher is still a good possibility, Essaye said. Markets have a habit of repeating themselves, and the S&P 500 has failed in round numbers this year, likely due to the impact of derivatives traders, a minimum of four times. He said that 3,800 is an important near-term tipping point to watch, because a break above could trigger a potentially violent squeeze higher, while another failure would mean new lows are all but certain, Essaye said.

Technical analyst Andrew Adams, who wrote a Wednesday note for Saut Strategy, described the market as taking baby steps to try to find a bottom, but noted that a close above the 3,800 level would provide some comfort.

According to the chart below, Adams said there was technical justification for the S&P 500 bounce where it did on Friday, providing at least some preliminary indications that a potential low was struck. He wrote that a follow-through to the upside is necessary in the days ahead, with the first hurdle at 3,800 and a test of the gap on the chart between 3,838 and 3,900.

The technician noted open space between 3,800 and roughly 4,100 on the chart thanks to the market's recent fall over the past few weeks, and argued that if the S&P 500 can sustain a move above 3,800 it is possible that a price vacuum could pull the index higher. The environment is at risk of being below 3,800.

I'll feel a little better about taking chances on the long side if the S&P can break above 3800 and hold above it, Adams wrote. If that happens, I think the more aggressive participants can start adding back to some risk in hopes of a possible low being struck.