S&P 500 correction to $4,650 becomes tangible threat

The S&P 500 Index (SPX) closed in the red last week for the first time since mid-August. The daily chart illustrates that it has not challenged the upper boundary of its half-year ascending channel for two months. Conversely, the channel's lower boundary has consistently halted previous attempts to initiate a full correction. A decisive break below this support line would immediately open a target for bears near 6,450.

Despite the SPX's gain on Friday, the RSI and Stochastic indicators have exited overbought territory, creating conditions for a more pronounced drawdown. Sellers' key target would likely be the 6,450 level, where the 50-day exponential moving average (EMA 50) currently resides. But even if it dips a bit, it's still less than 4% from the all-time high, falling short of a full-fledged correction. For a drop to attain this status, quotes would have to get close to the 100-day moving average (EMA 100) and the 23.6% Fibonacci retracement around 6,250.

Friday's consumer spending data aligned with forecasts, resulting in a moderately positive response. Traders believe the upcoming US labor market report on October 3 is set to have a similarly favorable impact. For this to happen, the job creation and unemployment figures must strike a balance. The data must not be so robust as to prompt the Federal Reserve to cut interest rates further, nor so weak as to fuel concerns over an immediate economic recession.

Bloomberg analysts identified two potential catalysts for a US stock market correction. First, a possible government shutdown on October 1 could negatively affect investor sentiment just before earnings season begins in two weeks. Second, projections for an 8% rise in American corporate profits have created elevated expectations. This would be the third-strongest quarterly growth in three decades. If these expectations are not met, there is a risk of widespread stock selling and disappointment.

The following trading strategy may come into play:

Sell the S&P 500 index at the current price. Take profit: 6,450. Stop loss: 6,750.