The stock market is primed for more downside after the S&P 500 suffered a "major breakdown" on Monday, according to Fairlead Strategies' Katie Stockton.
Both Stockton and Stephen Suttmeier of Bank of America expect the S&P 500 to test support at 3,500.
"Momentum gauges point lower, and short-term oversold conditions are not widespread," Stockton said.
US stocks were in risk-off mode on Monday amid growing concerns of an economic recession, high inflation, and rising interest rates. The S&P 500 fell as much as 4%, with losses were exacerbated by a rout in cryptocurrencies, which saw a significant sell-off after the Celsius Network halted withdrawals.
Stockton expects the S&P 500 to trend towards its next support level of 3,505, which represents potential downside of about 8% from current levels. "Momentum gauges point lower, and short-term oversold conditions are not widespread," Stockton said.
Stockton isn't the only technical analyst that expects the S&P 500 to continue its downtrend to the 3,500 level, as Bank of America's Stephen Suttmeier highlighted in a Monday note. Suttmeier said that the S&P 500's inability to clear resistance of 4,160 during last month's rally makes the current price action even more bearish.
"The inability to clear first resistances and the lack of bullish follow-through signals from the indicators increase the risk for lower lows toward the next supports at 3500," Suttmeier said, adding that a decline to that level would represent a 50% retracement of the March 2020 through January 2022 rally.
The S&P 500 falling to 3,500 also makes sense because it currently represents the rising 200-week moving average, Suttmeier said, which proved to be solid support level during market sell-offs in 2011, early 2016, and December 2018.
If 3,500 doesn't hold as support on the S&P 500, investor concerns will grow as to whether the current secular bull market holds, or if it gives way to a drawn-out bear market that takes years to resolve, similar to what happened during the 1970's amid persistently high inflation.
But there is precedent for support to temporarily break before the longer-term bull market revives itself, according to Suttmeier.
"Cyclical corrections in a secular bull market occasionally undercut and/or spend some time below this longer-term moving average on a weekly closing basis. This happened from early November 1957 to mid April 1958, late May 1962 to late November 1962, late February 1982 to late August 1982, October 1990 and late March 2020 to early April 2020," Suttmeier explained.
The rising 200-week moving average for the S&P 500 currently sits at 3,503, with the index currently trading at 3,781.
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