How Far Will The Market Fall?

Zooming out is often quite helpful in providing insights as to where the market is likely to go. When we examine a chart of the S&P 500 now on a weekly basis, a clear uptrend from mid-2022 has formed.

So too has a strong resistance line been created at close to the 4,800 mark both at the end of 2021 and the end of 2023. With the market showing signs of weakness now near that level, and pulling back modestly, how far could it fall if momentum starts to gallop lower?

Based on the chart above, a further key technical level can be drawn from the 2022 lows and forming an up-trending support line by connecting the 2023 lows. If the market fails to breach above the 4,800 resistance level, the next obvious stopping point on the journey downward is around 4,400 by mid-April.

What Are The Odds The Market Will Fall?

After a 24.7% run-up in the S&P 500 last year, a pause in the bull run would certainly be warranted. Pullbacks shake out the weak hands too, creating the energy needed to power higher once again. But there is reason to be open-minded about where the market will go now. It’s not obvious that a downhill march is certain.

When we look to notable analysts calling for a correction now they span the gamut from Jim Cramer to Tom Lee at Fundstrat, an avid bull in 2023. As analysts increasingly shift their views and outlooks from optimistic to pessimistic, investors need to be wary that the market often likes to buck the consensus trend. Some analysts call the most likely direction of the market the pain trade, meaning it goes in the direction that catches most investors offside.

With the market simply bobbing and weaving around the highs now, no clear trend has yet formed on a weekly chart. It hasn’t breached resistance nor established a clear break of support and trend lower. You can see from the chart, however, that when trends form they tend to stay in motion for multi-month and even multi-year periods. Over the next week or so, it should become clear whether the market will break below the sharp uptrend it has been in since November and start to correct.

Which Way Will The Market Go?

In addition to the rising bearish sentiment, some real seasonal flows are going to subside from yesterday’s Vixperation onwards and so macroeconomic headwinds are likely to have a material effect on the market. If they don’t start to surface now, another weak periods spans the Valentine’s Day to end of February period when again the support from options flows dissipates.

The bottom line is the high likelihood for the coming few months is that a downtrend will materialize but price action should be the arbiter of any decision-making. Just because sentiment leans bearish and macro flows should take precedence over seasonal flows, a break above the 4,800 key resistance line would signal that the bulls are firmly in control and higher prices are likely.

Watch carefully over the next week to see how it plays out. Over the past few years, the next week or so in particular have proven to be a bear’s playground, and so bulls should approach with caution.