S&P 500 on track to finish above technical level that could give a lot of encouragement to stock market bulls

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S&P 500 on track to finish above technical level that could give a lot of encouragement to stock market bulls

The S&P 500 index was on track to finish above a technical level that could give a lot of encouragement to stock-market bulls who argue that the bear-market bottom is in, although chart watchers warned that it might not be a signal to go all in on equities.

The S&P 500 SPX has rallied 14.7% off its 2022 closing low of 3,666 through Thursday s close. On June 16 there was 77 set. A close above 4,231 would mean the large-cap benchmark has recovered 50% of its fall from a Jan. 3 record finish at 4796.56.

Since 1950, there has never been a bear market rally that exceeded the 50% retracement and then went on to make new cycle lows, said Jonathan Krinsky, chief market technician at BTIG, in a note earlier this month.

The S&P 500 went up 1% to close close to 4,250, while the Dow Jones Industrial Average DJIA rose around 265 points, or 0.8%, and the Nasdaq Composite COMP rose 1.4%. The S&P 500 traded as high as 4,257. On Thursday, 91 gave up gains to end at 4,207. Krinsky said in a Thursday update that an intraday breach doesn't cut it. See chart below Because the retracement is based on a closing basis, we would want to see a close above 4,231 to trigger that signal. He wrote that the tactical risk reward looks poor to us here, whether or not that happens.

Many technical analysts pay attention to what is known as the Fibonacci ratio, attributed to a 13th century Italian mathematician known as Leonardo Fibonacci of Pisa. It is based on a sequence of whole numbers in which the sum of two adjacent numbers equals the next highest number 0,1, 1,2, 3,5,13, 21 If a number in the sequence is divided by the next number, for example 8 divided by 13, the result is near 0.618, a ratio that's been dubbed the Golden Mean due to its prevalence in everything from seashells to ocean waves to the proportions of the human body. Technical analysts see key retracement targets for a rally from a significant low to a significant peak at 38.2%, 50% and 61.8% on Wall Street, while retracements of 23.6% and 76.4% are seen as secondary targets.

Jeff deGraaf, founder of Renaissance Macro Research, said in a Friday note that the push above the 50% retracement level during Thursday s recession may have triggered selling.

He observed that the retracement corresponded to a 65 day high for the S&P 500, giving 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 advisers, not just in the S&P 500 but in commodity, bond and forex markets as well.

He wrote that that level coincidentally corresponded with the 50% retracement level of the bear market. It forced the hand of one group to cover shorts CTAs while simultaneously giving another group Fibonacci followers an excuse to sell. Krinsky cautioned that previous 50% retracements in 1974, 2004, and 2009 all saw decent shakeouts shortly after clearing that threshold.

As the market has cheered peak inflation, we are now seeing a quiet rebound in many commodities, and bonds continue to weaken, he wrote Thursday.