• September 29, 2023

The stock market is extremely oversold and a rebound is likely, according to a technical analyst. These are the key technical levels to monitor.

NYSE trader
  • The S&P 500’s 4% decline over the past week has created extreme oversold levels, according to technical analyst Katie Stockton.
  • Volatility surged as much as 72% as fears of the new Omicron variant spread across markets.
  • These are the key support and resistance levels investors should monitor to gauge what direction the next move in stocks will be, according to Stockton.

The stock market’s 4% decline over the past week doesn’t sound bad given that the S&P 500 is up 22% year-to-date, and yet investors are still on edge, anticipating that this decline might be the start of a larger correction ahead.

Volatility has ripped higher amid fears of the new Omicron variant and hawkish comments from Fed Chairman Jerome Powell, with Wall Street’s fear gauge soaring as much as 72% since Friday. But now the stock market is hitting extreme oversold levels, suggesting that a rebound is imminent.

That’s according to technical analyst Katie Stockton of Fairlead Strategies, who said the S&P 500 is showing signs of downside exhaustion in a Thursday note to clients.

“Our market internal measures are flashing a collective oversold extreme, with four readings flashing green for the first time since September 24, 2020. This creates a backdrop supportive of a strong rebound,” Stockton said. But if a rebound doesn’t materialize, it would be reason to expect a more “prolonged correction,” according to Stockton.

These are the technical support and resistance levels Stockton is monitoring to gauge what direction the next move in stocks may be, according to the note.

The S&P 500

“The S&P 500 needs to rebound above 4540 to avoid a breakdown below its 50-day moving average, which would put next support near 4300,” Stockton said.

“Conversely, a strong close back above support [today, December 2] would provide a contrarian bullish takeaway,” Stockton said. At time of publication, the S&P 500 traded up 1.3% to 4570.

S&P 500 chart

The Russell 2000

According to Stockton, a breakdown below the 2200 area for the Russell 2000 small cap index would suggest a continued sell-off to its prior support range of 2066 to 2085. The index moved from overbought to oversold levels in just three weeks. At time of publication, the Russell 2000 traded up 1.6% to 2,182.

Russell 2000 technical chart

The Volatility Index

The surge in the VIX has highlighted just how fast the sell-off in stocks has materialized. According to Stockton, the weekly close of the VIX could determine whether the stock market is about to enter a high volatility regime.

“This places a good deal of weight on the next two days, which will determine whether breakdowns are confirmed, and whether the VIX will finish the week decisively above our risk threshold of 29,” Stockton said.

A weekly close for the VIX above that level will confirm last week’s surge and could lead to a period of heightened volatility. At time of publication, the VIX traded down 7% to 28.95.