S&P 500's Retreat May Be Over, Auerbach Grayson Says: Technical Analysis

The Standard & Poor’s 500 Index’s first back-to-back gain since April produced a buy signal in a trend measure, suggesting the biggest retreat since the bull market began may be over, according to Auerbach Grayson & Co.

The Moving Average Convergence/Divergence line, calculated using the S&P 500’s average level during the past 12 and 26 days, on June 3 crossed above the signal line plotting the 9-day average difference between the other two. The indicator shows the stock index, which dropped 8.2 percent in May for the worst month since February 2009 and fell another 2.3 percent last week, might reverse those losses.

“The painful May correction has run its course and a powerful advance has commenced,” Richard Ross, global technical strategist at Auerbach, wrote in a note on June 3. “This streak of futility” when the S&P 500 was unable to advance two days in a row at any point last month “has left the benchmark index bruised, but not broken, and too shall pass,” he said.

The S&P 500 has fallen 13 percent from its 2010 high on April 23 on concern the debt crisis in Europe will curb the global economic growth. The index last week rose for two consecutive days for the first time since April, then plunged 3.4 percent on June 4, after the U.S. Labor Department jobs report showed lower employment growth than the median economist estimate.

The MACD chart flagged this year’s first buy signal on Feb. 16, one week after the S&P 500 sank to its 2010 low. The benchmark then rallied as much as 11 percent in the following months through April. The other two buy signals were sent in April, both of which occurred after the MACD line stayed below the signal for just one or two days.

Overcoming Resistance

While the MACD chart may signal more gains, the S&P 500 will need to overcome resistance at its 200-day average, Ross said. The index fell below its average over the past 200 days on May 20 for the first time since July and has since stayed below it. On June 3, the S&P 500 failed in its second attempt to exceed the average -- at 1,106.63 as of June 4 -- and closed at 1,102.83. The stock index closed on June 4 at 1,064.88.

A close above the level “would further buttress our bullish belief and potentially provide the catalyst for the initial leg of the coming ascent,” Ross said.

The S&P 500 has gained 57 percent from a 12-year low in March 2009 as the economy returned to growth.

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net.

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