August Low Is Chart Focus as S&P 500 Starts Giving In to Gravity

  • Three huge rallies aren't enough to retrace 25% of total loss
  • Concern investors burned at 1,867 won't buy the dip again

For the Standard & Poor’s 500 Index, the path of least resistance has been down.

Even though the three biggest rallies of 2015 have come in the last eight days, gains haven’t been consistent enough to erase even a quarter of the ground lost since mid-August. Today’s 1.8 percent decline pushed the gauge within 3 percent of its Aug. 25 closing low, a level that a chorus of chart watchers say is starting to exert irresistible gravity.

Greed is giving way to fear in a market where rushing in and buying every time stocks showed weakness had already stopped working before the latest selloff. Should investors who added stocks at the bottom get burned again, the concern is they may not stick around.

“With a retest of the August low seeming more likely than not, it will be interesting to see whether the ‘buy the dip’ mentality will once more prove to be as effective as it was first time around,” wrote Michael Shaoul, the chief executive officer of Marketfield Asset Management LLC. “Our sense is that much of the latent buying power was exhausted in the climactic move off the lows, but we would keep an open mind on this issue.”

That’s a view shared by Carter Worth, a New York-based technical analyst at Cornerstone Macro LLC, who said some investors were seduced by the bounce of the Aug. 25 low.

“I think that crowd is gone now,” Worth said. “Real money has been lost in this downturn.”

The charts show why this bout of volatility is doing more damage to bullish sentiment than past ones -- particularly the selloff that erased $1.6 trillion from American shares over the first 15 days of October last year.

“For the first time in a while the bears have an advantage in the intermediate term while the jury’s out on the long-term,” Jeff Weiss, chief technical analyst at Clearview Trading Advisors Inc., said by phone. “If the S&P can’t hold the area just above 1,900, the next zone is in the 1,865 region. The August 25th low is weighing on us not just because it was a low but because there’s an important trend line there.”

The benchmark index dropped 1.7 percent to 1,918.12 at 3 p.m. in New York.

Last year, the October decline was the worst rout for U.S. equities in more than three years. But it was followed by an even more powerful rally. After bottoming, the S&P 500 rose on 16 of the next 22 days, en route to an advance that lifted it almost 11 percent by the end of the year.

That’s why Worth is less concerned about possible “tests” of recent lows and is focused on the October 2014 threshold of 1,862.49. “This is the real reference point,” he said. “I think the downside is very likely from here.”

He points to the MSCI ACWI Index, a group that tracks developed and emerging companies, as a harbinger for U.S. stocks. This index broke below its October 2014 threshold to form a nearly two-year low on Aug. 25.

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