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Traders brace for S&P 500 free fall as chart supports crumbling

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(Bloomberg) — The spillover from the proposed tax cuts in the UK is flooding the US stock market.

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The S&P 500 fell as much as 1.9% on Friday, pushing the price past 4.5% in the week. The index already closed below the closely monitored level of 3,800 this week, making June’s bear market low of 3,666 the next line of support on technical charts.

The UK government unveiled a sweeping tax cut plan that crashed the country’s pound and bonds, as investors worried about the stimulative effects as inflation ramped up. That soured an already sharp mood for risky assets around the world. The S&P 500 plunged 1.7% at 10:09 a.m. in New York, and traders watching charts for signs of where the decline could abate are bracing for the worst.

“The technicalities have fallen out of bed,” Art Hogan, chief market strategist at B. Riley, said in a phone call. “Losing 3,800 now brings the June lows in sight, so that leaves people waiting for that to happen.”

The S&P 500 fell for the fourth day in a row and is on track for its fourth weekly decline in five. The sell-off has been relentless across all sectors: the meter has caused more than 400 members to close lower each of the last three days before Friday.

The breakdown since the peaks in August is strengthening the downward trend channel since the bull market peaked in early January, according to Gina Martin Adams of Bloomberg Intelligence. “The breakdown below 3,900 support leaves little for the index to understand as it tests its June lows,” she wrote in a note.

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The Federal Reserve made crystal clear this week that it will continue to raise interest rates sharply until officials see signs that price pressures are easing. That process will not be “painless” for the labor and housing markets, Fed Chair Jerome Powell warned.

Wednesday’s rate hike came with forecasts that the central bank has another 1.25 percentage points of tightening in store for investors this year, a much more aggressive pace than investors had anticipated.

Despite the defeat, stocks are still far from obvious bargains. At its low in June, the S&P 500 was trading at 18 times earnings, a multiple that surpassed valuations of all previous 11 bear cycles, data collected by Bloomberg shows. In other words, if stocks recover from here, this bear market bottom will have been the most expensive since the 1950s.

While investors used to be positioned as if the economy was heading for a soft landing, that is no longer the case, according to Anastasia Amoroso, chief investment strategist at iCapital.

“What the markets really need to do is price in a recession because it looks like a weakness in the labor market would eventually cost that,” she said on Bloomberg TV this week.

The market has been trading in the 3,700-3,800 to 4,300 range for some time now, she said.

“Maybe we need to see a breakthrough below the bottom of that trading range to find really dirt cheap value in stocks,” Amoroso said. “We’re just not there yet, so the trade for now is to actually be defensive and get paid while you wait for this bottom in the market.”

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As for the June low, many see an ominous signal in the figure.

“Anything below where it is now feels devilish,” Kim Forrest, founder and chief investment officer at Bokeh Capital Partners, said in an interview.

(Update prices everywhere.)

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