S&P 500 Breaks Nine-Month ‘Uptrend Line’: Technical Analysis

The Standard & Poor’s 500 Index fell below its “uptrend line” since August, suggesting the gauge of U.S. equities is more likely to make new lows for the year before reaching new highs, Dahlman Rose & Co. said.

The index fell 1.2 percent to 1,317.37 yesterday, breaking below the trend line that’s established by connecting the lows on August 26 and March 16, Bloomberg data show. That breakdown put the S&P 500 at risk of falling toward a cloud support on the ichimoku chart for a third time this year, said Rick Bensignor, chief market strategist at Dahlman Rose. The bottom of the cloud support sat at 1,296.56 recently, which would represent a 1.6 percent decline.

“We believe that odds begin to increase -- far more than generally expected -- for new 2011 lows to occur before new highs,” Bensignor wrote in a note yesterday. “It could be the kick-off of more selling to come.”

The S&P 500 has dropped 3.4 percent from an almost three-year high on April 29 as economic data missed economists’ estimates and investors prepared for the Federal Reserve to complete its $600 billion bond-purchase program, known as quantitative easing or “QE,” at the end of June. The index has rallied 26 percent since Aug. 26, the day before Fed Chairman Ben S. Bernanke said he was prepared to take action to help the economy.

The bottom of the cloud support served as a stem to the S&P 500’s decline on March 16, when the index reached its 2011 low, and again on April 18.

“Further clarification should come on a qualified downside breach of the bottom of the daily cloud,” Bensignor said. “We raise the yellow caution flag, amidst a market that is still predominated by an absence of true substantial long-only selling.”

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

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