With many market participants filing out early into the weekend last week, it didn’t take much to push stocks over the edge Friday afternoon. While the S&P 500 still closed the month of May roughly 2% higher, Friday’s cascade lower right into month-end was something to behold … and it could spell more near-term trouble ahead.
Click to EnlargeTo be more specific, Friday’s close pushed the S&P 500 below immediate-term support around 1635, which was the low on May 23. And last week’s choppy action acted as a precursor to the eventual selloff on Friday. As it so often goes, corrections in price tend to follow spikes in price volatility.
From here, while the index could bounce somewhat in the immediate term, the next downside target is closer to 1600, a level that coincides with the November uptrend, and thus the uptrending channel that I drew on the chart. The same level would also amount to a 61.80% Fibonacci retracement of the entire April-to-May rally. In other words, the 1600 area serves as a confluence area of attraction and support.
Click to EnlargeTo be sure, Friday’s selling was widespread and took every sector in the S&P 500 with it. The financials looked especially ugly. On the chart of the SPDR Financials (XLF) at right, you’ll see that Friday’s selling confirmed the intermediate-term market top from May 22 and now favors further downside in stocks like JPMorgan (JPM), Morgan Stanley (MS) and the XLF fund itself.
Click to EnlargeThe Dow Transports — as represented by the iShares Dow Jones Transportation Fund (IYT) — led much of the rally early on this year, but Friday left a nasty bearish reversal behind on its chart. This ETF looks to have at least another 2% of downside toward the $109.60 area in the immediate term.
Most important, the market structure slowly changed over the past few weeks as Treasury yields rose to fresh 2013 highs. This first caused dividend-paying stocks (such as utilities) to get hit, followed by more intraday volatility in the broader market the past two weeks.
Friday’s bearish price action confirmed that stocks are now willing to do some price discovery, or mean-reversion — for the first time in 2013. This is not to say that the market is going to fall apart from here, but the bulls should have it somewhat more difficult for the time being.