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“I’m not even looking at the stock market.”
That was President Trump’s remark last Thursday during the S&P 500’s worst single-day loss of the year.
We’ve seen plenty of uncertainty around tariffs against Canada, Mexico, and China. As a result, the S&P 500 sank toward its lowest levels of 2025. It’s the worst sell-off in over six months.
Investors might have hoped the stock market drop would persuade President Trump to pivot away from tariffs. But his comments suggest otherwise.
The pullback has the S&P 500 testing a critical level for the first time in over a year.
At the same time, investors might wonder if the sharp sell-off is finally overdone.
So today, let’s evaluate the state of the S&P 500… and the key level that you need to watch…
Tracking the Stock Market’s Phases
Trading doesn’t have to be overly complicated.
It comes down to figuring out if stock prices are trending or ready for a mean reversion.
Trending is exactly what it sounds like. A stock keeps moving in one direction. Recently, that direction has been lower.
On the other side, mean reversion looks for a price trend that has gone too far in one direction and is ready to reverse course.
A sudden change in direction is a great profit opportunity.
Most of my trades fall in the mean-reversion category. Knowing when a trend is about to reverse has served me well.
That’s especially the case this year. As the S&P 500 has jumped around, I’ve used call and put options to profit from pullbacks and rebounds this year.
To be a successful mean-reversion trader, there are signs in the price action to look for.
With that in mind, here are the key levels and momentum gauges I’m watching on the S&P 500…
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The S&P 500’s Critical Test
Following a new all-time high on February 19, the S&P 500 has fallen as much as 7%. It’s the biggest sell-off since last summer.
And the pullback is taking the S&P 500 to levels it hasn’t seen since 2023.
Take a look at the chart below:
The drop in the S&P has brought the index down to the 200-day moving average (MA – green line).
It’s the first time the S&P has tested the 200-day MA since 2023.
At the same time, measures of momentum are hitting oversold levels. The Relative Strength Index (RSI) is nearing the 30 level (circle). The RSI has only been this oversold on five other occasions since this bull market started in late 2022.
Of course, oversold readings don’t mean stocks have to immediately stage a relief rally from here. It will depend on other signals as well.
And remember, the S&P 500 is sitting right on a critical level at the 200-day MA. If it breaks down through the 200-day MA, that could mean more turmoil is ahead.
So right now, we’re in wait-and-see mode. We’ll want to hold until we get a clear indication of the next move.
Ultimately, I do expect more selling ahead. But it won’t be a straight drop lower.
The good news is, as a mean-reversion trader, we can make good use of these swings. The rubber band will get stretched too far in one direction and come snapping back.
And we can profit when it does… then play the opposite side.
So stay tuned in the coming weeks. We’ve already had a very active start to the year with our options trading… and I don’t expect things to slow down anytime soon.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict