CREDIT SUISSE: The stock market is on the verge of establishing a 'major top'

If you want to get nervous about the stock market, Credit Suisse is here to help.

In a note to clients on Tuesday, David Sneddon and his team at Credit Suisse think that the S&P 500 is at risk of forming a “major top.”

Using technical analysis, Sneddon looks at the S&P 500 and says that if the index falls below the 1,820 level, we could be looking at a breakdown and an indication that the index has hit a big time top.

On Monday, the S&P closed at 1,881.

Here’s Sneddon:

As we have highlighted several times, a number of indicators have been pointing to a deteriorating situation for the US equity market — a bearish moving average “death cross,” medium-term uptrend break, and probably most worryingly of all rising volume on the decline — and we have been looking for the market to retest the spike low from August at 1,867, and then medium-term support at 1,820, the October 2014 low. With several key sectors now also falling to major support levels — notably Industrials — and looking vulnerable, we think the risk a major top may be established has risen sharply.

On Monday, the market started the week on an ugly note, with the Dow falling 312 points and the S&P losing 2.5%. The big losers on Monday were pharmaceutical and biotech stocks, with the Nasdaq’s biotech ETF losing more than 6.5% on Monday alone.

After a sharp sell-off at the end of August, the market was rocky but trading in a narrow range ahead of the September 17 Federal Reserve decision. The Fed held rates at 0% and after a quick pop higher, stocks have been trading lower ever since.

And now, the market is approaching its lows hit not only back in late August but also the lows hit during last October’s sell-off.

Here’s Sneddon’s more, well, technical breakdown of what could be in store for the benchmark index:

Below 1,867 should keep the risk lower for price and “neckline” support at 1,832/20. Below here would mark the completion of an important top, turning the core trend bearish. If achieved, we would target 1,738/30 initially — the low for 2014 itself, and the 38.2% retracement of the 2011/2015 uptrend. Although we would expect this to hold at first, a break would be favoured in due course for 1,575/74 — the 38.2% retracement of the entire 2009/2015 bull market.

Here’s the chart.

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