- The stock market is poised for a "significant relief rally" after it tested a key support level on Thursday, according to Fairlead Strategies' Katie Stockton.
- The S&P 500 fell more than 2% Thursday morning after a higher-than-expected CPI report, but has since recovered all of those losses and then some.
- "Seasonal influences are positive in the second half of October," Stockton highlighted.
The stock market's violent reversal on Thursday could lead to a "significant relief rally" after testing a key technical support level, according to Fairlead Strategies' Katie Stockton.
The S&P 500 fell nearly 2.5% on Thursday following the release of September's CPI report, which showed prices rising more than expected and all but cemented a more hawkish policy response from the Federal Reserve.
But after the S&P 500 hit a low of 3,491 at 9:36 am, it recovered all of its losses and then some, rising as much as 2% to a high of 3,662.
The more than 4% swing in the S&P 500 today is of little surprise to Stockton, who told clients in a note on Thursday that the index was gearing up for an imminent test of a key support level: 3,505. That level represents a 50% retracement from the March 2020 COVID lows of about 2,200 and the January high of about 4,800.
"The S&P 500 has seen its daily MACD whipsaw lower in a delayed reaction to the failed oversold bounce earlier this month. This is a setback that suggests ~3,505 support may be in store for a test (even today, potentially) before a significant relief rally," Stockton said before the market open, referring to the Moving Average Convergence Divergence indicator.
The sharp reversal is bolstered by the fact that, according to Stockton, stocks have historically performed well during the second-half of October.
In fact, October has been dubbed a "bear market killer" by Carson Wealth's Ryan Detrick, who observed in a note earlier this month that of the previous 17 bear markets, stocks bottomed in October six times. The seasonals get even more positive when you consider the upcoming mid-term election.
According to Stockton, any relief rally that takes hold in the stock market could send the S&P 500 to its first big resistance test around 3,914, which represents potential upside of 9% from Wednesday's close.
Still, even if such a move occurs, Stockton sees deterioration in long-term momentum indicators and would use rallies as an opportunity to sell.