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A stock market correction is likely in the coming weeks, says Fairlead Strategies’ Katie Stockton.
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Technical indicators suggest a decline of nearly 10% for the S&P 500.
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Investors should use relief rallies to hedge and only hold stocks that are trading above key support levels, Stockton said.
A correction in the stock market is looming in the early days of 2025, a note from Fairlead Strategies said this week.
The technical-focused research firm led by Katie Stockton said in a Wednesday note that a continued sell-off in the S&P 500 is likely over the next few weeks.
The index flashed new intermediate-term “sell” signals that were confirmed last week, creating a setup that “supports a correction over the coming weeks,” Stockton said.
Technical sell signals noted by Stockton include the MACD and daily stochastics, two momentum-based indicators, as well as a signal known as the DeMARK Indicator.
The end of the seven-day Santa Claus trading window on Friday also bolsters the case for a continued decline. The final trading days of the year and the first two sessions of the new year historically see strong gains for stocks.
The note said that long-term indicators monitored are pointing to a correction in the first quarter, which should then give way to a sideways trading range “of several months in duration.”
“The SPX shows signs of long-term upside exhaustion per the DeMARK Indicators after having neared a long-term measured move objective of 6120. Similar long-term ‘sell’ signals preceded corrective environments in 2018 and 2022,” Stockton said.
The alignment of intermediate- and long-term “sell” indicators flashing means “a correction could be significant,” Stockton said.
Potential support levels to monitor include the S&P 500’s 200-day moving average at about 5,555, which would represent potential downside of 6% from current levels, followed by a drop to about 5,337, representing a drop of 9%.
The S&P 500 is down 4% from its record high reached in early December.
To prepare for a potential correction, Stockton recommends investors use any relief rally in stocks as an opportunity to “deploy top-down hedges,” and to only hold stock positions that are in strong uptrends and are trading above support levels defined by a rising 20-day moving average.
“But consider using stop-losses since they are likely to be affected by a broad sell-off,” Stockton said.
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