The stock market may be gearing up for a relief rally after key signals hit oversold extremes

• The stock market is gearing up for a relief rally after a brutal sell-off, according to Fairlead Strategies' Katie Stockton.
• Stockton highlighted that 5 internal stock market indicators just hit oversold extremes.
• "After [Tuesday's] emotional trading we think we are one step closer to a short-term low," Stockton said.

The stock market is gearing up for a relief rally after an interest rate-driven decline that sent the S&P 500 lower by 8% over the past two months. 

That's according to Fairlead Strategies' founder Katie Stockton, who said in note to clients that various technical indicators hit "oversold extremes" on Tuesday after a crescendo of panic selling.

"After [Tuesday's] emotional trading we think we are one step closer to a short-term low," Stockton said, highlighting that key levels of support for the S&P 500 are now in play. Stockton identified the S&P 500's 200-day moving average at 4,203, as well as the 4,180 to 4,195 as key levels of support to watch, all of which are about 1% below current levels.

The indicators Stockton is monitoring include CNN's Fear & Greed Index, which showed "Extreme Fear" among investors, as well as a decline in breadth and momentum indicators like the difference between new highs and new lows of issues on the New York Stock Exchange.

The last time Stockton observed five stock market indicators hit oversold extremes was in June 2022, which represented a short-term low for the S&P 500 as it embarked on a two-month long relief rally of about 18%.

But Stockton isn't ready to hit the buy button for stocks just yet.

"The decline could be deemed climactic referencing those measures of sentiment, breadth, and leadership [hitting extremes], but we want more evidence of a low before adding exposure," Stockton said.

Stockton wants to see the S&P 500's stochastic indicator, which measures momentum, rise back above 20%, which would generate an oversold "buy" signal. The stochastic indicator currently stands at around 10%. 

Stockton also wants to see the S&P 500 find and successfully test its support level before buying stocks.

"It is also important to see support discovery, with the 4,180 to 4,200 area key toward the preservation of the cyclical uptrend," Stockton said. 

If the S&P 500 manages to successfully test support and then embark on a short-term relief rally, Stockton is monitoring 4,460 as a logical area of resistance, which represents potential upside of about 5% from current levels.