Chart Advisor: The S&P 500 Breakdown Alert!

By David Keller, CMT

The S&P 500: What’s Next After Breaking 5850?

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The S&P 500: What’s Next After Breaking 5850?

Let’s talk about the big move we’ve been anticipating—the S&P 500 has finally dipped below our “line in the sand” at 5850. And then just as quickly, the SPX popped right back above this key support level! Here’s what stands out as I’m reviewing the chart of the S&P 500.

A Market in Red

As of last Friday, January 10, the market wasn’t exactly painting a pretty picture. The S&P 500 was flirting with lower numbers, and no sector has been spared. Growth favorites like tech? Down. Sturdy value plays like financials, industrials, and healthcare? Also down. Across the board, it was all red.

If you’ve been following along on my market recap show, CHART THIS with Dave Keller, you know we’ve been keeping an eye on the market’s weakening breadth since mid-December. This latest break below 5850 is just another confirmation of what’s been brewing: key sectors are losing steam.

Why the Close Matters

So, after a key breakdown, what happens next? First, we need to confirm that this break below 5850 is the real deal. It’s not just about dipping below that level during the day—it’s about where the market closes. Why? Because closing prices carry more weight when assessing trends.

For example, we’ve seen the S&P dip below 5850 a few times recently, only to rally back and close above it. Without a true close below that level, the market has kept the bears at bay. But if we do see a close below 5850, and the market follows through in the days after, that’s when things could start getting interesting.

After inflation data came out this week, we saw the SPX pop back above 5850 as investors considered the possibility of further rate cuts in the coming months. We feel 5850 remains the most important level to watch, because we are one lower high away from confirming a clear bearish trend for stocks.

Setting Downside Targets

If the S&P closes back below 5850 and momentum continues, where could it go? That’s where technical analysis gives us some tools to work with. Here are three ways we can identify potential downside targets:

1. Head and Shoulders Pattern:
   There’s a possible head-and-shoulders top forming on the S&P chart. Even if it’s not textbook-perfect, it’s worth noting. By measuring the distance from the “neckline” of the pattern to the “head” and projecting downward, we land at a target of around 5600.
2. Fibonacci Retracement Levels:
   Taking the August swing low to the December high, the 50% retracement level aligns almost exactly with 5600. This alignment adds another layer of confidence to 5600 as a significant support area.
3. 200-Day Moving Average:
   The 200-day moving average, a long-term trend indicator, hasn’t come into play for a while. Right now, it’s sitting near 5570. By the time a potential decline reaches this level, it could align closer to 5600, further strengthening this target.

When these methods point to the same general area, it’s a signal to pay attention.

The Big Picture

So, what’s the takeaway?

• Keep an eye on how the market closes relative to 5850.
• Watch for follow-through in the days ahead.
• Look for key support around 5600, but stay flexible as market dynamics evolve.

The goal here isn’t to predict exact levels but to stay tuned into the trends and adjust as the story unfolds. And as always, the charts will guide us.

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Originally posted 23rd January 2025