The stock market lows in June are back in sight after the S&P 500 loses traction at 3,900

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Equity bears held the upper hand last week, with the S&P 500 ending Friday below a crucial chart support level, prompting technical analysts to warn of a possible test of the June lows.

“Over the past three years, the level on the [S&P 500] with the most traded volume was 3,900. It closed on Friday for the first time since July 18, which we believe opens the door to the June lows “at 3,640,” said Jonathan Krinsky, chief market engineer at BTIG, in a Sunday note (see chart below).

BTIG

The S&P 500 SPX,
-0.72%
ended Friday at 3,873.33 – down 0.7% in the session and 4.8% for the week for the lowest close since July 18. That left the index 5.7% higher than the closing trough of June 16 of 3,666.77. According to FactSet, the S&P 500 hit an intraday sell-off low at 3,636.87 on June 17.

The Dow Jones Industrial Average DJIA,
-0.45%
fell 4.1% last week, ending Friday at 30,822.42 as the Nasdaq Composite COMP,
-0.90%
saw a weekly decline of 5.5% to 11,448.40.

A return to the June lows likely won’t be a straight line, Krinsky wrote, but the so far lack of discernible “panic” in the Cboe Volatility Index VIX,
+0.11%
futures curve and the lack of a decline to more extreme oversold conditions, as measured by the monthly relative strength index, don’t bode well, he said.

Other analysts have noted that there is no sharper rise in the spot VIX, often referred to as Wall Street’s “fear gauge.” The options-based VIX ended at 26:30 on Friday after trading at 28.42, above the long-term average around 20, but well below the panic levels often seen at market bottoms above 40.

Shares had recovered strongly from the June lows, when the S&P 500 was down 23.6% from its January 3 record at 4,796.56. Krinsky and other chart watchers had noted that in August the S&P 500 completed a retracement of more than 50% from its decline from its January high to its June low — a move that has not been followed by a new low in the past.

However, Krinsky had warned against chasing the bounce at the time, writing on Aug. 11 that the “tactical risk/reward seems bad to us here.”

Michael Kramer, founder of Mott Capital Management, had warned in a note last week that a close below 3,900 would set up a test of support at 3,835, “where the next big hole in the market lies.”

Shares fell sharply last week after a Tuesday reading of the consumer price index from August showed inflation was rising higher than expected. The data bolstered expectations for the Federal Reserve to see another super-big 75 basis point or 0.75 percentage point rise in Fed Funds interest rates, with some traders and analysts forecasting a 100 basis point increase as policymakers wrap up a two-day meeting on Wednesday. .

Example: The Fed is ready to tell us how much ‘pain’ the economy will suffer. However, it still won’t indicate a recession.

The market bounced off of its June lows as some investors became more confident in a Goldilocks scenario in which the Fed’s tightening policy would wring out inflation in a relatively short period of time. For bulls, the hope was that the Fed would be able to turn away from rate hikes and avert a recession.

Stubborn inflation figures have raised investors’ expectations for where they think yields will end up, raising fears of a recession or a sharp slowdown. Aggressive tightening by other major central banks has fueled fears of a broad global slowdown.

To see: Can the Fed tame inflation without crushing the stock market? What investors need to know.

Listen to Ray Dalio at the Best New Ideas in Money Festival on September 21 and 22 in New York. The hedge fund pioneer has strong views on where the economy is headed.

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