S&P 500 Drop May Lead to ‘Deeper Correction’: Technical Analysis

The Standard & Poor’s 500 Index, which had its biggest weekly drop in three months last week, may face a “deeper correction” should it fall below its average during the past 20 days, according to StockCharts.com Inc.

The benchmark for U.S. equities yesterday fell to 1,197.75, about 2 points above that threshold, and is approaching the support level for a third time since the end of August. The index broke below the average five times this year, four of which were followed by losses of at least 6.4 percent, according to Bloomberg data.

“That’s an important test that will help determine the market’s short-term direction,” John Murphy, chief technical analyst at StockCharts.com, wrote in a note yesterday. “A decisive close below the 20-day line would signal a deeper correction” that could take it down to its 50-day average, recently at 1,164. That’s 2.8 percent below yesterday’s close.

The S&P 500 last week dropped 2.2 percent, snapping a five-week rally, after concern about Europe’s debt crisis intensified, speculation China will boost interest rates grew and Cisco Systems Inc.’s profit projection missed analysts’ estimates. The index has rallied 17 percent from its 2010 low in July amid improving earnings and speculation the Federal Reserve will stoke growth by pumping more cash into financial markets.

Technical analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.