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How Much Further Can The Stock Market Break Down?

By Michele SchneiderStock MarketsMay 12, 2022 01:04AM ET
www.investing.com/analysis/how-much-further-can-the-stock-market-break-down-200624014
How Much Further Can The Stock Market Break Down?
By Michele Schneider   |  May 12, 2022 01:04AM ET
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Taking a step back and looking at important reference points and percentages helps us grasp where the stock market is and where it’s potentially going.

Focusing on the small-cap index, the Russell 2000 (IWM) has broken its 200-Week moving average at $176.13.

The last time IWM was under its 200-WMA was in October of 2020.

The recent breakdown is leading many to ask, how much further can the stock market break down?

IWM Weekly Chart
IWM Weekly Chart

While that question cannot be answered with certainty, we can look for long-term support areas and average market drawdowns to give us clues on what will happen next.

To get straight to the point, let’s look at the above chart. IWM is currently sitting on support right before the pandemic crash at $170.6. This price area needs to hold if IWM wants to stand its ground.

It should be noted that the past 15 bear markets had an average drawdown of -30% using the S&P 500. Right now, the S&P 500 (NYSE:SPY) is only down -17% showing it has room to break lower based on previous bear markets.

Additionally, IWM is down about -30% from its all-time high, and the NASDAQ 100 is down -28%.

This places investors in a worrying spot as the market fundamentals don’t look too bright. Inflation is at a 40-year high and geopolitical stress from the Ukraine war continues.

Additionally, China’s recent surge of COVID adds pressure on supply chain issues.

Having said that, we need to look for the major indices to find support at their current price areas. Especially in the IWM since it has the best technical support from the pre-pandemic breakdown.

If the stock market cannot rally at its current price area, watch for the downward trend to continue as the SPY heads closer to its average -30% bear market breakdown.

On the bright side, of the 15 bear markets, 5 ended after a -19% move lower.

How Much Further Can The Stock Market Break Down?
 

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How Much Further Can The Stock Market Break Down?

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Comments (5)
Fyr Werx
Fyr Werx May 12, 2022 11:29AM ET
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Why does no one see this for what it is: An enormous bubble bursting. This is an "Everything Bubble." Very similar to the crash of 1929-30 after the Spanish Flu pandemic and then a hugely value-inflated stock market. If history is a guide, we should be concerned about a Depression, not a Recession. And, the Great Depression lasted 10 years!
Meru Pet
Meru Pet May 12, 2022 3:13AM ET
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to 0 ;)
Haroon Imtiaz
Haroon Imtiaz May 12, 2022 2:50AM ET
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Nicely written straight forward view point without too much unnecessary jargon. My only concern this time around is the extent of excessive leverage we have built in our financial system which may extend the misery!
Sevantilal Patel
Sevantilal Patel May 12, 2022 2:37AM ET
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she has courage and honesty to tell the story as it is. she is not a part and parcel of Wall Street all the time bulls.
Franc Fil
Franc Fil May 12, 2022 1:21AM ET
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S&P 500 target = 1800.
 
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