8 Charts Suggesting Stock Market Pullback Could Deepen in the Near-Term

October 8

U.S. stocks dipped on Monday, with the Treasury yield surging past 4% for the first time since August, setting a cautious tone ahead of critical inflation data and the kickoff of earnings season.

The fell 0.9%, shedding around 400 points after hitting a fresh record high last week.

The dropped nearly 1%, while the saw a steeper decline of 1.2%, weighed down by Big Tech stocks leading the broader market lower.

As stock markets pull back after recent highs, let’s take a look at 8 charts suggesting the stock market correction could still have room to run.

1. S&P 500 in Island Top

The S&P 500 fell 90 bps yesterday, closing at 5695, bringing the zero gamma level back into focus. This area has strong support, primarily because it separates the post-FOMC gap higher from the current island we’re sitting on.

If the index gaps lower yesterday, it could create an island reversal top, initiating a move back to 5620. A drop below 5620 would push the index toward 5400. data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///ywAAAAAAQABAAACAUwAOw==

2. Nasdaq 100 in Diamond Top

It also looks like the has formed either a diamond top or a head and shoulders pattern.

Both patterns suggest a move back to 18,480. This could be a significant move, as it impacts the larger bear pennant that has been forming in the index since the July peak.data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///ywAAAAAAQABAAACAUwAOw==

3. USD/CAD Higher, Signaling S&P 500 Could Come Under Pressure

Meanwhile, the closed at its highest level since mid-August, potentially reclaiming resistance at 1.36. Typically, when the USD/CAD moves higher, the S&P 500 moves lower, and I don’t expect this time to be any different.data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///ywAAAAAAQABAAACAUwAOw==

4. Volatility Spike

The 1-month implied correlation index spiked sharply yesterday. As the market moves lower, implied volatility tends to rise across the board, making stocks more correlated.

This is why a higher 1-month implied correlation index is often a signal that the index is breaking lower.data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///ywAAAAAAQABAAACAUwAOw==

5. High-Yield Bonds Drop

Yesterday was the first time in a while that the moved lower by a significant amount. This will be important to monitor, as it’s one of the easier ways to track credit spreads.

Right now, it appears to be heading lower, potentially toward the lower Bollinger Banddata:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///ywAAAAAAQABAAACAUwAOw==

6. Biotech Stocks at Risk of Breakdown

The biotech ETF likely won’t fare well if rates at the back end of the curve continue to rise.

The ETF seems to have formed a quadruple top around $101.25 in recent weeks and is now on the verge of breaking a major long-term uptrend dating back to the October 2023 lows. A move back to $87 is certainly possible.data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///ywAAAAAAQABAAACAUwAOw==

7. Adobe Drops

Adobe (NASDAQ:) had a rough day, dropping nearly 4% and, more importantly, breaking support at $505 to close around $487. It now looks set to fill the gap created in June, which sits at $468.data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///ywAAAAAAQABAAACAUwAOw==

8. Alibaba’s Run to End Soon?

Alibaba (NYSE:) has had a significant run since the announcement of the ‘Stimulus’ plan in China. From a technical perspective, the stock looks stretched at this point.

There are a lot of assumptions being made about what the Chinese Communist Party plans to do, and maybe they’ll follow through, maybe they won’t. Personally, I don’t put my investing faith in the CCP.data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///ywAAAAAAQABAAACAUwAOw==

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