Global stocks continue to slide as concerns about soaring inflation, rising interest rates, the war in Ukraine, and the possibility of a recession weigh down on investor sentiment.
The S&P 500 is down 16% year-to-date, the Dow Jones Industrial Average has fallen 11.7%, and the Nasdaq has tumbled 25%. The TSX is also in the red year-to-date but not nearly as much, down 5.0%.
The big question is whether the markets have reached a bottom yet or if there is more downside ahead for the S&P 500, Nasdaq, Dow Jones Industrial Average, and TSX?
One way in which analysts try to determine if stocks are nearing a bottom is to look at various technical indicators. That is, they look at chart patterns, trading volume, support and resistance levels, and other statistics to identify selling and buying points.
What Do Technical Indicators Say About the Stock Market?
While it’s impossible to predict a bottom, a technical analysis can provide investors with entry and exit points. Two technical indicators suggest stocks have further to fall: both the head and shoulders pattern and Fibonacci retracement each suggest the S&P 500 could fall to a tested support level of 3,800 and if it breaks below that, potentially 3,600.
Right now, the S&P 500 is at 3,997, That suggests the S&P 500 could fall an additional nine percent. That also represents a more than 21% drop from its early January highs.
A technical analysis also sees support for the Dow Jones at around 29,000 to 30,000, which represents an additional 9.5% to 6.5% drop from the current level of 32,111. The Nasdaq meanwhile is at 11,676 and nearing its support of 11,000.
Another technical indicator, the Cboe Volatility Index (VIX), often referred to as the “fear index,” points to additional pain. The VIX is up 75% year-to-date and is hovering near 29; the long-term median is approximately 18. Since 1990, the markets have bottomed when it index hits an average of 37.
The VIX rises when stocks fall, which means investors are fearful, and falls when stocks rise, because investors are more confident. Right now, investors are fearful the U.S. economy could slip into a recession.
While these and other technical indicators are flashing red, that doesn’t mean investors need to wait on the sidelines. What it means is they need to be more selective of what they invest in. And because of the big drop in North American stock prices, the closer the markets get to a bottom, the closer investors are to an enormous, even generational, buying opportunity.
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