- Investors should view the three-day sell-off in stocks that began last week as a short-term setback within a longer-term bull market, JPMorgan said in a note on Wednesday.
- The decline in the broad indexes led by technology stocks hasn’t violated critical support levels and came as the indexes were in overbought conditions.
- The absence of euphoric sentiment readings among investors is one more reason JPMorgan thinks the recent market sell-off will be temporary.
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The three-day sell-off that began last week is just a “setback within a bull trend,” according to JPMorgan.
In a note published on Wednesday, JPMorgan said the technicals behind the nearly 10% sell-off in the S&P 500 lacked the traditional patterns found at a market top.
“The absence of trend deceleration, a broad distribution pattern, and/or euphoric sentiment readings” led JPMorgan to view the tech-driven sell-off as a healthy pullback from overbought momentum conditions, the note said.
JPMorgan said it expected the S&P 500 to “find its footing” near a confluence of support at 3,305 to 3,223, representing downside potential of 1% to 3% from Tuesday’s close.
A decline to JPMorgan’s technical support level of 3,233 would represent a peak-to-trough fall of 10%, which would be the S&P 500’s first correction since it emerged from pandemic lows on March 23.
For the market to stage a sustainable rebound and continue to reach new highs in this bull market, the S&P 500 would need to rise above a range of 3,455 to 3,494 “to regain traction,” JPMorgan said.
For the tech-heavy Nasdaq 100 index, JPMorgan said it expected short-term support to be found at 11,000 to 11,400. Below that, the firm sees medium-term support at 10,313 to 9,736, representing potential downside of 5% to 10% from Tuesday’s close.
On Wednesday, the Nasdaq gained 1.8%, to 11,044, within the support range highlighted by the bank.
“The lack of a clear top pattern signals this is a setback and not the end of the 2020 bull trend,” JPMorgan concluded.