How far can this pullback go?

Mid-week technical update: In my weekend market commentary, I wrote that I was intermediate term bullish on equities (see The trend is your friend (breadth, seasonality and sentiment too)). However, my inner trader was tactically watching the relative performance of the cyclical sectors for signs of market weakness.

Now that cyclical stocks have weakened and, in particular, oil prices seem to be rolling over, the key question is how much further can the current pullback go?

An examination of the daily SPX chart shows that it closed about 1% above a key support zone, bounded at the upper end at about 2040 and the lower end at the 200 day moving average (dma) at 2015. RSI-5 (top panel) flashed a short-term sell signal, but readings are not oversold yet indicating further downside potential.

Will the decline stop at 2015-2040 or is this the start of a deeper correction?

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