S&P 500's Retreat After 50% Recovery Signals Caution to Technical Analysts
Traders who base day-to-day decisions about whether to buy stocks on chart patterns say yesterday’s decline in the Standard & Poor’s 500 Index may signal additional losses this week.
The benchmark index for U.S. equities rose to 1,131.23 before reversing and falling to 1,113.20 at 4 p.m. in New York. The rally fizzled above 1,120.84, the level marking a 50 percent recovery of its October 2007 to March 2009 plunge, and 1,130.29, the midpoint of its intraday highs and lows in 2010.
“We don’t expect a major plunge, nor a break of the recent lows on the S&P 500 near 1,040, but after the strength of the past two weeks, some short-term weakness could happen,” said Ryan Detrick, chief technical strategist at Schaeffer’s Investment Research in Cincinnati. The index’s failure to hold gains may signal “more downside pressure,” he added.
Shares have been influenced by price patterns this month as traders await the start of the second-quarter earnings season in July. While daily swings pushed the VIX, the benchmark measure of U.S. volatility expectations, almost 50 percent above its average level in the past 20 years, the S&P 500 completed its biggest two-week rally since November on June 18 after reports showed the economy is growing and Europe’s efforts to contain its debt crisis bolstered confidence.
GDP Expansion
The stock index lost 1.6 percent to 1,095.31 at 4 p.m. in New York today as a drop in U.S. home sales underscored concern the recent advance in equities may have overshot prospects for the economy.
Forecasts for the fastest expansion in U.S. gross domestic product since 2004 and the biggest jump in company earnings in more than a decade have pushed the S&P 500 up 62 percent since March 2009. The index is trading for 13.5 times estimates for 2010 profits, compared with an average multiple of 16.4 since 1954 using reported results, according to data compiled by Bloomberg.
The gauge has gained 4.3 percent since June 7, paring its loss since reaching a 19-month high on April 23 to 10 percent. It climbed 2.4 percent on June 15 as investors focused on a level calculated from the index’s value over the last 200 days and is little changed in the four sessions since.
“It is an interesting zone,” said Stephen Suttmeier, a vice president in U.S. technical and market analysis at Bank of America Corp. in New York. “Our main view is that if the S&P doesn’t take out 1,150, the bears remain in control.”
Economy, Profits
The U.S. economy may grow at a 3.2 percent rate in 2010, according to the median estimate of 67 economists surveyed by Bloomberg. Profit among S&P 500 companies is poised to increase 18 percent this year and in 2011, estimates from more than 1,500 equity analysts compiled by Bloomberg show.
The S&P 500 fell 0.4 percent as of 4 p.m. in New York yesterday after jumping as much as 1.2 percent in the first hour. Losses in retailers and computer makers spread to the rest of the market as the 50 percent recovery failed to hold.
The 1,150 level represents “key resistance” for the index because it’s about where a rally ended on Jan. 19 and marks a 61.8 percent retracement of the decline from April 26 to May 26, Suttmeier said.
Technical analysts who use the Fibonacci ratios described by Leonardo of Pisa in “Liber Abaci” in 1202 believe the price of an asset may reverse an earlier gain or decline after reaching certain levels. Among those thresholds are the midpoint between an asset’s high and low points as well as levels marking the recovery of 61.8 percent, 38.2 percent and 23.6 percent of reversals of the previous trend.
Loss Retracements
The S&P 500 failed this year to achieve a 61.8 percent retracement of the bear market between Oct. 9, 2007, and March 9, 2009. It closed at 1,217.28 on April 23, its highest level of the year, missing that Fibonacci level by 0.7 percent.
The S&P 500’s 50-day average is another challenge facing stock bulls, Suttmeier said. Currently at 1,135.50, the index’s average over the past 50 trading days may be a point at which investors decide to sell, stopping the rally, he said.
“Traders are moving the market right now, that’s why technical levels matter,” said Marc Pado, the San Francisco- based U.S. market strategist at Cantor Fitzgerald LP. “When you retrace a move 50 percent, it’s a resistance point. It’s one technical tool. What I like to see is several of them converge to create an opportunity. To say the market will fall further based on one level is too myopic for me.”
To contact the reporters on this story: Elizabeth Stanton in New York at estanton@bloomberg.net; Joanna Ossinger in New York at jossinger@bloomberg.net.
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