With many market participants filing out early into the weekend last Friday, it likely 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 cascading lower in stocks, right into month end is something to behold but not to get overexcited for.
To be exact, Friday’s close did push the S&P 500 below immediate-term support around 1,635 which was the low on May 23. Furthermore, last week’s choppy action acted as a precursor to the eventual sell-off 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, which is a level that also happens to coincide with the November 2012 up-trend, and thus the up-trending channel that I drew on the chart. The same level would also amount to a 61.80% Fibonacci retracement of the entire April – May rally. In other words, the 1600 area serves as a confluence area of attraction and support.
To be sure, Friday’s selling was wide-spread and took every sector in the S&P 500 with it. Notably, the financials looked ugly. On the below chart of the SPDR Financials Fund (XLF) Friday’s selling confirmed the intermediate term market top from May 22nd and now favors further downside in stocks like JPMorgan (JPM), Morgan Stanley (MS) and the XLF etf, as well as the BKX Banking Index.
The Dow Transports as represented by the iShares Dow Jones Transportation Fund (IYT), which led much of the rally early on this year, left a nasty bearish reversal behind on its chart on Friday and it too looks to have at least another 2% of downside toward the $109.60 area in the immediate term.
Most importantly, 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 the utilities to get hit, which was followed by more intraday volatility in the broader market the past two weeks. Finally, with last Friday’s bearish price action stocks have confirmed that they are now for the first time in 2013 willing to do some price discovery, or mean-reversion. This is not to say that the market is to fall apart from here, but the bulls should have it somewhat more difficult for the time being.