U.S. stocks had another ugly day on Thursday, amid risk-off mood and capitulation on Wall Street. After moving between small gains and losses in morning trading, the tug of war resolved to the downside, with all three major equity averages registering their weakest close for the year.

When it was all said and done, the S&P 500 declined 0.13% to 3,930, recovering from a 1.8% drop that had the index flirting with bear market, a period of prolonged declines in which an asset has fallen 20% or more from a recent high. Although a bear market does not in itself predict future returns, it can certainly increase investor pessimism and further reduce risk appetite, especially if the condition afflicts the world’s most important benchmark.
As for the catalysts, the drivers remain the same: stagflation and Fed jitters. Traders are increasingly convinced that the inflationary environment will require a more forceful policy response, which may lead to a recession, a dreadful scenario for the U.S. consumer and, of course, for corporate earnings. Whether the excessive pessimism is justified is irrelevant, what matters now is that traders are convinced that trouble is coming and are acting on that belief by buying downside protection and shying away from stocks.

With no relevant U.S. economic data or key Fedspeak for the next couple of days, sentiment will remain fragile, preventing any meaningful rebound in risk-assets.
For the 20% decline condition to be met, the index will need to break below the 3,855 area. By looking at the daily chart below, we can see why this is problematic: just around those levels, we have a key technical support corresponding to the March 25, 2020 swing low. If this floor were to be taken out, sellers could accelerate the move lower, with the next notable barrier at 3,800, followed by 3,725.

On the flip side, if dip buyers return to take advantage of the oversold condition and spark a bullish reversal, the first resistance to take into consideration comes in at 3,980, and 4,060 thereafter.