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Is a pullback ahead? Maybe if the S&P dips below 1,775
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Is a pullback ahead? Maybe if the S&P dips below 1,775

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Is a pullback ahead? Maybe if the S&P dips below 1,775

Whether or not last week’s sell-off was a correction or the correction, investors need to keep an eye on technical levels, says Michael O’Rourke, chief strategist at JonesTrading.

“In Friday’s trading, the S&P 500 SPX -1.02% cash broke below both the 50-day moving average and the 1,800 support level. The next notable technical support is 1,775-1,780. With the exception of very minor support at 1,745, there is little support down to the 1,700 level,” he says in The Closing Print.

More than one strategist has said in the past 24 hours that the 1,775 level on the S&P 500 needs to hold or it will open up a whole new phase of selling for markets.

Peter Cardillo, chief market economist at Rockwell Global Capital is also eyeballing that number. He is not convinced that the correction from last Thursday and Friday is the correction for which some have been waiting. The most recent pullback, he says, knocked 3.25% off the S&P 500 from its 52-week high of around 1,850. Why does he think this is not the big one?

“If you look at global economies, growth is basically holding steady even though China’s PMIs came down. I don’t think that’s real reason for concern and Europe is starting to see some daylight. Here in the U.S. we’ve had some soft numbers, but I don’t think that reverses the better trend we’re in. So fundamentally speaking, there’s no real change in the outlook.

He’s also less convinced the earnings picture is that gloomy.

However, Cardillo says he’ll change his mind if the S&P 500 can’t hold onto 1,775. At that point, he says, he would consider that he is wrong and that this is the big correction. In a December roundup, MarketWatch found that most of Wall Street’s big 10 investment banks expected the S&P 500 will end this year at 1,952, around a 9% gain from current levels.

Wall Street was showing signs of life in the early going, but the sting of last week’s losses aren’t likely to be forgotten fast. And the fallout on emerging markets, another trigger for last week’s downturn, was carrying on Monday, though some hopes were riding on Turkey, where a pause in the rout proved somewhat of a salve to other emerging currencies. At SocGen, analysts said in a note Monday that assets in these countries are still at risk and they are keeping a significant underweight call on emerging markets and commodities.

At Credit Suisse, they were telling clients that the correction has started and as the S&P 500 is only 3% from its record level of 1,850, it can keep going. Two things they noticed out of last week: “no panic selling,” but also “no one bought the dip.”

If it’s any consolation, strategist Dan Greenhaus of BTIG says investors should remember that in the past two years there have been several corrections similar to, or larger than, what was seen late last week. Some examples: June 2013 when the S&P 500 tanked 4% in just two sessions due to the Fed and in November 2012, the loss was 3.6% over elections. April and June of 2012 also saw similar declines.

From gloomsville, analysts at Goldman Sachs (who told us in November that the S&P could see a 10% drop sometime this year — the bank has a 1,900 year-end target), said in a note on Monday that the downward bias for the S&P 500 could continue based on their sentiment indicator. That gauge shows institutional clients are holding high net-long futures positions, which implies negative returns over the four-to-eight-week period starting late December. At that point, it breached 90 and it’s now at 82.

Is a bigger S&P 500 pullback ahead? Watch this key tech level - The Tell - MarketWatch

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