GOLDMAN SACHS: Stocks are at a key level and we expect 'one more leg to new lows' – Business Insider

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A trader works on the floor of the New York Stock Exchange in the Manhattan borough of New York January 13, 2014. REUTERS/Lucas Jackson

  • The stock market is testing a key level right now, Goldman Sachs warns.
  • Technical analysis shows the selloff that gripped the markets earlier this year may not be over just yet.
  • A retest of the recent lows looks possible.
  • Check out the S&P 500 in real time.

The volatility that rocked the markets earlier this year might have calmed down a bit, but Goldman Sachs warns the selloff may not be over just yet.

The S&P 500 tumbled more than 10% over a 10-day period in late January/early February, bottoming out at 2,532. It has since recovered most of its losses, rallying all the way back up to almost 2,800, where it is contending with a key level.

In a note to clients sent out on Sunday, Goldman Sachs’ technical team, led by Sheba Jafari, fingered this area as the level to watch in the S&P 500.

“This 2,789-2,793 area includes the interim high from late- February, a minor equality target from Mar. 2nd as well as 76.4% retrace off the January high,” Jafari wrote. “Given just how many pivots are converged there, should be an interesting one to watch for signal. Initial bias is to expect a top/turn.”

Jafari and her colleagues used technical analysis — specifically the Elliott wave theory— to show the more than 10% drop that took place earlier this year likely has further to go.

The Elliot Wave Principle identifies up-and-down trends in the market on charts. Its basic idea is that human behavior tends to move and then revert in recognizable cycles, especially when traders are acting like a herd; what goes up eventually comes down.

A complete cycle has eight waves — the first five are impulsive, while the last three are corrective (A, B, C) — and that’s where we are now.

“Structurally speaking, the move since February qualifies as the B wave of an incomplete ABC pattern,” Jafari says. “There would need to be evidence of impulsive behavior (which hasn’t been seen yet) to override the expectation of one more leg to new lows (wave C).”

As to how far the S&P 500 can fall, Jafari doesn’t give a target, but warns a retest of the recent lows could be in the cards. “The 200-dma remains critical down at 2,570,” Jafari wrote.

Goldman Sachs