June 7 (Bloomberg) -- A five-month low reached last week by the Standard & Poor’s 500 Index produced a pattern similar to one at last year’s low, indicating equities may be poised to rebound.
While the benchmark measure sank June 1 to the lowest level since January, its 14-day relative strength index, which measures the degree to which gains and losses outpace each other, reached 28.5, staying above a low of 23.2 reached on May 18, according to data compiled by Bloomberg. Last year, the S&P 500 dipped on Oct. 3 to a level not seen since September 2010, with the RSI holding above its August low. The index then surged by 29 percent over the next six months.
“This divergence highlights that sellers are losing momentum and control,” Joshua Dollinger, chief quantitative and technical strategist at BTIG LLC in New York, wrote in an e-mail. The “signals certainly make a compelling case to be long” over the next six weeks, he said.
The S&P 500 tumbled 9.9 percent from this year’s peak on April 2 through June 1 amid concern global economic growth is slowing and Europe’s debt crisis is worsening. In last week’s final session, the index fell the most since November, sending the benchmark gauge below its average price in the past 200 days for the first time since December, as a Labor Department report showed the economy added the fewest jobs in a year.
The index has since added 2.9 percent, lifting it back above the 200-day average, amid speculation global policy makers will act to stimulate the economy. China cut interest rates for the first time since 2008 today, a day after European Central Bank President Mario Draghi said officials in the region stand ready to act and Federal Reserve Bank of Atlanta President Dennis Lockhart said extending the stimulus program known as Operation Twist is an option.
Richard Ross, global technical strategist at Auerbach Grayson & Co., said the retreat may have run its course.
“The false breakdown beneath the 200-day moving average provided a fitting capstone to the textbook 10 percent correction, which has set the stage for a sustainable summer surge,” Ross, based in New York, wrote in a note yesterday. “The bullish RSI divergence reinforces our belief that prices should push out through 1,340 and retest 1,400. A fresh new high above 1,420 must now be considered.”
On Oct. 3, 2011, when the S&P 500 reached the year’s low of 1,099.23, the RSI fell to 36.2, holding above a low of 16.5 reached on Aug. 8, according to data compiled by Bloomberg. The index then rallied for the next two quarters before the advance stalled at 1,419.04 on April 2 this year.
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