In One Chart: Why bulls looking for a stock-market bottom are obsessed with 4,231 on the S&P 500

by | Aug 12, 2022 | Stock Market

The S&P 500 index was on track Friday to finish above a technical level that could deliver a big dose of encouragement to stock-market bulls arguing that the bear-market bottom is in, though chart watchers warned that it might not be a signal to go all in on equities. Through Thursday’s close, the S&P 500
has rallied 14.7% off its 2022 closing low of 3,666.77 set on June 16. A close above 4,231 would mean the large-cap benchmark has recovered — or retraced — 50% of its fall from a Jan. 3 record finish at 4796.56.

“Since 1950 there has never been a bear market rally that exceeded the 50% retracement and then gone on to make new cycle lows,” said Jonathan Krinsky, chief market technician at BTIG, in a note earlier this month. Stocks were higher Friday, with the S&P 500 up 1% trade near 4,250, while the Dow Jones Industrial Average
advanced around 265 points, or 0.8%, and the Nasdaq Composite
rose 1.4%. The S&P 500 traded as high as 4,257.91 on Thursday, but gave up gains to end at 4,207.27. Krinsky, in a Thursday update, noted that an intraday breach of the level doesn’t cut it (see chart below).


“Because the retracement is based on a closing basis, we would want to see a close above 4,231 to trigger that signal. Whether or not that happens, however, the tactical risk/reward looks poor to us here,” he wrote. Why is 50% important? Many technical analysts pay attention to what’s known as the Fibonacci ratio, attributed to a 13th century Italian mathematician known as Leonardo “Fibonacci” of Pisa. It’s based on a sequence of whole numbers in which the sum of two adjacent numbers equals the next highest number (0,1,1,2,3,5,8,13, 21…). If a number in the sequence is d …

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