S&P 500 ‘Hammer,’ 20-Day Lows Signal Bottom: Technical Analysis

The Standard & Poor’s 500 Index formed a hammer-shaped candlestick pattern this week, and more than half the stocks in the equity benchmark fell to 20-day lows, technical signals that the market may rebound.

On March 15, the index traded 2.1 percent below its opening price before rallying to close near the day’s initial level, a hammer-shaped candlestick that suggests the market may be in the process of forming a bottom, said Arthur Huprich, an analyst with Raymond James & Associates Inc.

The same day, 56 percent of S&P 500 stocks slipped to their lowest levels in the past 20 days, the highest proportion since August, Strategas Research Partners said. That indicator shows the retreat since February may have run its course, as readings above 50 percent have preceded gains in the past, said Christopher Verrone, lead technical analyst at Strategas, who cited data going back to 1973.

“The integrity of the uptrend of the March 2009 low is intact,” Verrone said in an interview. “So we’re approaching this much like we approached every pullback over the past two years. The dip should be bought.”

The S&P 500 has dropped 6.4 percent from a 32-month high on Feb. 18 amid concern rising energy costs will curb the global economic recovery and Japan’s nuclear crisis will worsen. The market entered its third year of bull market this month after the S&P 500 rallied 95 percent in the first two years from a 12- year low on March 9, 2009. The index yesterday dropped as low as 1,249.05 before paring losses to close at 1,256.88.

‘One Hurdle’

The formation of the hammer pattern on March 15 suggested that the market had “cleared one hurdle, namely the establishment of a ‘low,’ ” Huprich said in a report dated yesterday. Whether this marks a turning point depends in part on “news driven events such as Japan and the Middle East,” he wrote.

There had been 49 occasions when the proportion of stocks making 20-day lows exceeded 50 percent of the S&P 500 since 1973, Strategas data shows. On average, the benchmark index rose 1.4 percent in the following month and was 7 percent higher three months later. The last time when more than half of S&P 500 stocks reached 20-day lows was on Aug. 24. The index bottomed two days later and rallied every month except November.

“There is a considerable cluster of support in the 1,200 to 1,240 neighborhood that even we break through 1,260 here, I think the market finds some meaningful support in that neighborhood,” Verrone said.

Technical 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

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

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