Fibonacci Test May Take S&P 500 to Record: Technical Analysis

The Standard & Poor’s 500 Index may rise by year-end to a level seen by technical analysts as a harbinger for a return to the benchmark’s 2007 record, according to Ryan Detrick at Schaeffer’s Investment Research.

The U.S. stock gauge closed at 1,165.32 yesterday, within about 65 points of recovering 61.8 percent of its loss between October 2007 and March 2009. Should the S&P 500 rise above this Fibonacci retracement level of about 1,230, it could mark the start of a “long-term” climb toward its all-time closing high of 1,565.15 three years ago, Detrick said.

Fibonacci analysts use a system pioneered by 13th century mathematician Leonardo of Pisa that assumes asset prices will follow patterns based on proportions found in nature. The S&P 500 last approached the 61.8 percent retracement level when it climbed to 1,217.28 on April 23, before plunging as much as 16 percent on concern that U.S. unemployment and widening budget deficits in Europe will derail global growth.

“The overall sentiment toward this market is a little too low,” Detrick, senior technical strategist at Schaeffer’s, said in a telephone interview from Cincinnati. “We’ve been watching equity mutual fund outflows. When you have that negativity, it can be very bullish.”

Investors redeemed $3.18 billion from U.S. equity funds during the first week of October, according to EPFR Global, a research firm based in Cambridge, Massachusetts. The pace of outflows rose to the highest level in five weeks, managing director Brad Durham wrote in a note Oct. 7. EPFR tracks global funds managing $13 trillion in total assets.

Technical analysts who use the Fibonacci ratios say the price of an asset tends to 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.

Strategists surveyed by Bloomberg forecast, on average, that the S&P 500 will end the year at 1,195, short of the 61.8 percent retracement level.

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