The stock market could fall an additional 10% if it breaks below this key support level, Fairlead Strategies says

The S&P 500 could see an additional 10% sell-off if it breaks below a key support level.Katie Stockton of Fairlead Strategies highlighted 4,546 as a key level to watch for the S&P 500.Below that, “downside risk would increase to next major support near 4,200,” Stockton said.Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The S&P 500 could sell-off an additional 10% from Friday’s close if its breaks below a key support level that is fast approaching, according to Katie Stockton of Fairlead Strategies.

Stockton highlighted 4,546 as crucial support that the S&P 500 needs to hold in order to prevent further downside. A decisive, consecutive daily close below that level would increase the chance of downside risk to its next major support level of 4,200.

“This would dictate risk management via reduced [equity] exposure and top-down hedges,” Stockton said in a Tuesday note. The S&P 500 fell nearly 2% to 4,582 in Tuesday trades. The S&P 500 managed to find support around the 4,550 level during drawdowns in early- and mid-December. 

The downside pressure for stocks has been led by the technology sector amid a hawkish pivot from the Federal Reserve, with several interest rate hikes appearing likely this year.

The Nasdaq 100 index is fast approaching its 200-day moving average and is down 8% from its record high. On Tuesday, the tech-heavy Nasdaq fell 2%, well below its key support level of around 15,575, according to Stockton. Consecutive daily closes below that level would increase downside risk to “next major support near 14,400 with a ~6-8 week time horizon,” Stockton said.

A decline to that level represents additional downside potential of 8% from Friday’s close. On Tuesday, the Nasdaq 100 Index hit a low of 15,292, which is well below Stockton’s support level.

“Short-term momentum has weakened and the FAANG+M stocks have failed to react to short-term oversold readings in another setback,” Stockton said.

If the S&P 500 reaches Stockton’s downside target of 4,200, that would represent a sell-off of 13% from its record high reached on January 4.

While that may feel like a big drop for some investors, it’s actually pretty typical. The S&P 500 only experienced a drawdown of 5% over the course 2021 before finishing the year up 27%. But since 1980, it experienced an average intra-year sell-off of 14%, according to JPMorgan.

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