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S&P 500 Index Hits Test at 50-Day Moving Average as November Gain Erased

For the second time in two sessions, the Standard & Poor’s 500 Index has rebounded after falling below its average price from the past 50 days, a level watched by analysts who make forecasts based on chart patterns.

The stock gauge dropped as much as 1.2 percent to 1,174.14 earlier, erasing its November gain, amid concern the European debt crisis is worsening. It climbed back above 1,180 as of 4 p.m. New York time. The index dropped 1.3 percent to 1,173.64 yesterday, then reversed most of the slump in the final 90 minutes of trading, closing at 1,187.76.

Should today’s recovery hold it may mean there’s enough demand to prevent a bigger selloff, said Ryan Detrick, senior technical analyst at Schaeffer’s Investment Research. Michael Shaoul, chairman of Marketfield Asset Management, said he’s less concerned this month’s retreat will worsen compared with the decline in April and May because five of ten industries in the S&P 500 are above their 50-day moving average, versus none six months ago.

“From a technician standpoint, this is encouraging,” said Detrick in a telephone interview from Cincinnati. “Yesterday’s rally from the lows coupled with today so far does suggest there’s some buyers down around that level. That’s a heavily watched trend line.”

Falling Through July

Detrick predicted on May 25 that a retreat in the S&P 500 below its February low of 1,044.50 would send the index toward 1,000. It dropped below that level on June 29 and subsequently slipped as low as 1,010.91 on July 1.

The S&P 500’s moving average for the last 50 days is 1,178.07, according to data compiled by Bloomberg. It was 1,177.31 yesterday, the data show.

The slump in April and May, driven by concern some European nations will be unable to repay their debt, drove the 10 main S&P 500 industries down to an average of 5.1 percent below their 50-day average. Now, the groups are 1.1 percent above that level on average, Bloomberg data show.

The S&P 500 is 15 percent above this year’s low on July 2 after companies reported higher-than-estimated profit and the Federal Reserve’s plan to increase asset purchases lifted stock prices. To some technical analysts, who base investment decisions on price and volume charts, a close below the 50-day moving average may signal a lasting retreat.

‘Much Better’

“This is a much better selloff for the U.S. than the April and May selloff,” said New York-based Shaoul, who helps oversee $1 billion and whose flagship fund beat 89 percent of peers over the past year. “This selloff is quite selective.”

The S&P 500 lost 13 percent in May and June, its biggest retreat since the bull market began in March 2009. The equity benchmark closed below its 50-day moving in the beginning of May and didn’t move above it until the mid-July.

While a decline below the 50-day moving average would accelerate losses, it may also bring an earlier end to the selloff, said Ralph Acampora, a technical analyst at Geneva- based Altaira Wealth Management.

“Right now you had a very mild short-term correction,” Acampora said in an interview from New York. “You have a little bit of a floor below it. If we were to break through it to the downside, it would extend the correction. If it did break down, it would probably create a bit of a down draft and that would probably end the correction.”

The 200-day average for the stock index is increasing and remains below the 50-day measure, which is reason to doubt that stocks will keep falling, according to Christopher Verrone, a technical analyst at New York-based Strategas Research Partners.

The gauge has fallen 3.7 percent after rising to a two-year high on Nov. 5 on speculation China will raise interest rates to tame inflation and concern the sovereign-debt crisis will spread to southern Europe. The S&P 500 hasn’t closed below its 200-day moving average, now at 1,133.73, since Sept. 10.

“I’m not too concerned,” Verrone said. “The continuation of this correction seems pretty shallow.”

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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