BTIG technical analyst Jonathan Krinsky said that while the S&P 500 has room to rally further without breaking out of its current downtrend channel, but he remains “cautious” on stocks given that market internals have been “struggling.” In particular, Krinsky noted that the percentage of S&P 500 components that have been trading below their 200-day moving average (DMA), which many view as a dividing line between longer-term uptrends and downtrends, ahs been below 55% for most of the days for the past six weeks. “This needs to change for the trend to change,” Krinsky wrote in a note to clients. Currently, 230 S&P 500 components, or 45.5%, are trading below their 200-DMA. “While select pockets of strength persist, the surge in commodity prices along with widening credit spreads and lack of breadth improvement suggest we have yet to see a final capitulation event,” Krinsky wrote. He believes the S&P 500 could fall below 4,000 before the correction runs its course. The top of the downtrend channel Krinsky referred to is about 1.8% above current levels, while 4,000 is about 8.8% below.
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