S&P 500 Retreat May Set Up Rally Above 1,370: Technical Analysis

A retreat in U.S. stocks will set the stage for the Standard & Poor’s 500 Index to approach 1,370, the level where the current bull market ran out of steam last year, according to analysts who study charts to predict market moves.

The benchmark index for U.S. equities slipped less than 0.1 percent to 1,344.33 yesterday on concern over Europe’s debt crisis as German Chancellor Angela Merkel said time was running out for Greece to accept conditions for a bailout. The S&P 500 had gained for five weeks, the longest streak in a year, sending its 14-day relative strength index, which measures the degree that gains and losses outpace each other, to the highest level since February 2011, according to data compiled by Bloomberg.

“We need to pause, rest, consolidate in order to stay healthy,” Carter Worth, New York-based chief market technician at Oppenheimer & Co., wrote in a note yesterday. “Any such consolidation would cure the market from a tad unhealthy right back to very healthy, and would be the perfect ‘setup’ for a breakout-type move to new 52-week highs.”

The S&P 500 peaked at 1,370.58 intraday in May as concern about Europe’s debt crisis interrupted a rally that pushed the index up 103 percent from a 12-year low. The benchmark gauge slumped 19 percent between April 29 and Oct. 3 as Europe was forced to bail out Greece while Congress and the administration of President Barack Obama struggled over deficit cuts.

Best Return

The index has since rebounded 22 percent on better-than-expected economic data and corporate earnings, generating the best return for any similar period since November 2009, according to data compiled by Bloomberg.

Its RSI reached 73.6 last week, the data show. Some technical analysts consider RSI readings above 70 a sign that stocks have risen too far, too fast. The proportion of New York Stock Exchange stocks trading above their 200-day averages rose to 68 percent, the most since May, according to the data.

“The persistency of both price appreciation and breadth since the beginning of the year suggests the next pullback will be a precursor to another attack on the 2011 highs,” Instinet Inc. said in a Feb. 3 note co-written by John Schlitz, chief U.S. market technician at New York-based company.

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