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S&P 500’s Cloud Chart Rings Alarm for Stocks: Technical Analysis

The Standard & Poor’s 500 Index is approaching its first sell signal since 2008 based on a Japanese charting technique, suggesting the market’s losses since July may deepen, according to Dahlman Rose & Co.

The benchmark index of U.S. equities dipped below the so-called lower cloud support on the weekly ichimoku chart for the first time since January 2008 on Aug. 12 and was still below the threshold on Aug. 19, according to Bloomberg data. An Aug. 26 close below 1,090 would indicate a loss of “all possible bullish structure,” said Rick Bensignor, chief market strategist at Dahlman Rose.

After the S&P 500’s decline below the cloud on Jan. 11, 2008, the index plunged 52 percent to a 12-year low in March 2009. It is down 13 percent in August, heading for the worst month since October 2008. Ichimoku charts use the midpoints of historic highs and lows to analyze a security or index. Clouds, or areas between two of the lines on the chart, are used to show levels where buy orders may be clustered.

“It’s certainly a caution flag that things are rapidly changing and that you’ve lost a lot of the bullish structure,” Bensignor said in a telephone interview yesterday. “But it’s not a full-scale sell signal yet.”

The S&P 500 tumbled 16 percent in the past four weeks amid concern Europe’s debt crisis is spreading and the U.S. economy may be headed for a recession. Almost $3 trillion was erased from the value of U.S. equities, according to data compiled by Bloomberg.

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