S&P 500 Index May Begin Correction: Technical Analysis

U.S. stocks may drop by as much as 5 percent in the next two weeks as the Standard & Poor’s 500 Index has reached the peak of a five-wave formation, according to technical analysts at UBS AG.

“The S&P 500 (SPX) is trading in a wave 5, which suggests the market is on its way to a first important tactical top,” Michael Riesner and Marc Mueller wrote in a note yesterday. “The current rally is driven by fewer and fewer stocks and this is usually something we see at the end of rallies or bull moves.”

The Zurich-based analysts said a setback could last as long as 10 days, dragging the benchmark gauge for U.S. equities to retest the 1,340 level. The number of stocks trading above their respective 20-day moving averages as well as the number of new 52-week highs continue to decline, they wrote.

The wave theory holds that stocks move in alternating waves of impulse and correction. A five-wave rally is typically followed by a three-wave decrease.

The S&P 500 slipped 0.3 percent to 1,405.52 yesterday. The measure has rallied 12 percent so far this year amid better- than-forecast economic and corporate data.

In technical analysis, investors and analysts study price graphs to predict changes in a security, commodity, currency or index.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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