A trader points to monitor displaying an S&P 500 Index (SPX) chart on the floor of the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

This Stock Chart Paints An Ugly Picture For Bulls

(Bloomberg) -- Bulls hoping the U.S. stock market will stage another of its famous rebounds are staring anxiously at a technical level that has been a pillar of the market’s foundation for almost three years.

It’s the 200-day moving average on the S&P 500 Index, an obsession on Wall Street after the benchmark index closed almost 1.4 percent below it Thursday. Selloffs in February, March and April all found a floor at the level, and the boundary has rarely been pierced since the beginning of 2016.

Right now, the message is discouraging, at least for bulls.

This Stock Chart Paints An Ugly Picture For Bulls

“If we have another day like this and close below the main moving averages, I’d be really concerned,” said Robert Parks, managing director of equity derivatives at RJ O’Brien & Associates. “It would probably show the selloff is here to stay.”

Charts don’t cause selloffs -- everything from rising interest rates to the trade war and concern corporate earnings are peaking gets the blame for that. But they can exert a kind of gravitational force on prices once moves intensify and professional traders become a bigger force in the market. About 11.4 billion shares changed hands on U.S. exchanges Thursday, 55 percent more than the average since 2008.

“Just breaching that intraday does not set off alarm bells. Closing below and not rebounding would be the second level of concern,” said Art Hogan, chief market strategist at B Riley FBR. “It takes a close below the 200-day moving average on significant volume and for that to stay there to be concerning.”

Technical levels are proxies for investor psychology, lines in the sand where past decisions to buy have paid off. If for no other reason than one trader knows others are paying attention to it, markets often turn extra volatile when an index gets near one.

Volatile it was on Thursday. The S&P 500 ended down 2.1 percent, capping its biggest two-day decline since February. Down as much as 2.7 percent before 3 p.m., bulls managed a half-hour rally that erased roughly half the decline, before selling kicked in near the close.

In the end, the S&P 500 finished at 2,738.37, compared with its 200-day moving average of 2,765.75. It’s the biggest gap since March 2016, the tail end of what still stands as the worst U.S. equity meltdown since Europe’s credit crisis.

This Stock Chart Paints An Ugly Picture For Bulls

Other touchstones of technical analysis turned extremely bearish Thursday. One, tracking the number of successive stocks trades occurring at a higher price versus lower ones, slid to the worst level since the flash crash in 2010.

People using charts and trading records for a sense of investor nerves are interested in one thing: when will the selling stop? It could be a while. By most measures, the decline that began six days ago in the U.S. market is still a relatively mild one, going by past declines. After Thursday, the S&P 500 was down 6.9 percent from its Sept. 20 record -- bad, but still about 90 points from a 10 percent correction.

Hopes that the tumble would quickly reverse are taking hits now.

“With a failed bounce attempt intraday, we’re starting to register a few more signs of notable pessimism or even outright panic,” said Jason Goepfert, Sundial Capital Research’s president, in a note to clients. “It’s understandable, since this is one of the few times in modern markets when the S&P 500 suffered back-to-back 2 percent losses during a generally uptrending market.”

Thursday’s plunge was in some ways more mystifying than Wednesday’s in that it blew up various narratives that made the first selloff at least explicable. Companies cheap enough to be considered value stocks in the Russell 1000 were down twice as much as their growth counterparts, reversing yesterday, when growth plunged twice as fast. The technology and communication services groups were the best performers in the S&P 500 after getting pummeled Wednesday. Bank and energy stocks flailed.

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