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Stocks  | May 1, 2020

The S&P 500 has hit a critical technical threshold that could signal sharp losses are imminent.

Traders are keeping a close eye on the 61.8% Fibonacci retracement level of the current market sell-off, which is 2,933 on the S&P 500.

On Thursday morning, the S&P 500 opened at 2,930, and it has since sold off more than 1%. 

In technical analysis, Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur in a particular security.

The inputs used to generate the Fibonacci retracement analysis are a recent emotional high and low in the market.

In this case, the high being used is 3,393, which occurred on February 19, and the low being used is 2,191, reached on March 23.

The most commonly watched Fibonacci ratios are 23.6%, 38.2%, 50%, and 61.8%. 

If the S&P 500 does stage a reversal at the 61.8% retracement level and continues to move lower, then traders will be keeping an eye on three crucial Fibonacci levels to see if they act as support:

  • 2,790, or the 50% Fibonacci retracement level. Implied downside of 4% from current levels.
  • 2,650, or the 38.2% Fibonacci retracement level. Implied downside of 8% from current levels.
  • 2,475, or the 23.6% Fibonacci retracement level. Implied downside of 14% from current levels.

If the market doesn't find support at any of those three levels, then traders will be expecting a retest of the March 23 low, or 2,191, which would represent downside of 25% from current levels.

The S&P 500 trading at a key technical resistance level comes at a time when investors will likely turn their attention to the often-cited market adage "sell in May and go away," which refers to an investment strategy based on the theory that stocks on average perform better from November through April than May through October.

Therefore, investors who follow the strategy sell their stocks in May and reinvest in November.

An analysis by Fidelity shows that since 1945, "the S&P 500 has gained a cumulative 6-month average of nearly 2% from May through October on a price return basis. That compares with a 6.7% average gain from November through April."

"Additionally, the S&P 500 has generated positive returns roughly two-thirds of the time from May through October, and 77% of the time from November through April."

Despite the better performance in stocks from November through April, investors who sell in May tend to miss out on gains.


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