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UBS Sees S&P Above 2012 High Before 10% Drop: Technical Analysis

Stock market trend charts and investor sentiment are signaling the Standard & Poor’s 500 Index may surpass its 2012 high before the rally gives way to a 10 percent decline, according to UBS AG.

The benchmark gauge for U.S. equities is likely to exceed this year’s peak of 1,419.04 and climb to 1,460, after it held last month above its March 6 low, said Michael Riesner and Marc Mueller, Zurich-based analysts with UBS. The S&P 500 halted a five-day slump on April 10 at 1,358.59. Two weeks later, it rebounded from another drop at 1,358.79.

The level of 1,358 “represents a new pivotal support for the SPX,” the analysts wrote in a note yesterday, referring to the S&P 500’s ticker. “As long as the market trades above this level, the U.S. market remains bullish biased,” they said. “Given the fact that the SPX has not met our initial correction target at 1,340 and on the back of the low bullish consensus, we still can’t rule out a final overshooting.”

The S&P 500 climbed 12 percent from January through March for the best first-quarter rally since 1998 amid better-than-forecast economic data and corporate earnings. The advance stalled in April as concern over Europe’s debt crisis and a slowdown in China drove the index down 0.8 percent, the biggest monthly decline since September.

‘Top Building’

The retreat was “only the beginning of a complex top building process,” Riesner and Mueller wrote. “Within this process we always favored to see a final bounce/rally.”

The S&P 500 rose 1.8 percent last week, reversing a 0.8 percent loss during the first day of trading. The rebound helped the index produce a buy signal on its Moving Average Convergence/Divergence chart on April 26, with the MACD line, calculated by subtracting the S&P 500’s average level during the past 26 days from the average over the past 12 days, rising above the “signal line,” which plots the 9-day average difference between the two.

While stocks recovered, bullish sentiment among investors remained low. A weekly survey from the American Association of Individual Investors, released on April 26, showed 27.6 percent of the respondents expected the market to rise over the next six months, the lowest ratio since Sept. 22. Falling optimism is considered as a contrarian indicator by some analysts who follow charts to make market predictions, because investors who have sold stocks now have more money to purchase shares.

“Generally, we have never seen a correction, let alone a bear market, starting with such a low bullish consensus, which means the likelihood to see higher prices into later May is high,” Riesner and Mueller said.

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