S&P 500 Decline After 50% Recovery Sends Bearish Trading Signal

June 21 (Bloomberg) -- The failure of Standard & Poor’s 500 Index to hold above levels monitored by analysts is sending a bearish signal to traders who base day-to-day decisions on whether to buy or sell stocks on price charts.

The benchmark index for U.S. stocks rose to 1,131.23 today before reversing course and falling to 1,113.20 at 4 p.m. in New York. The rally fizzled above 1,120.84, the level marking a 50 percent recovery of its October 2007 to March 2009 plunge, and 1,130.29, the midpoint of its intraday highs and lows in 2010.

Equities have been influenced by price patterns this month in the absence of other catalysts as traders await the start of the second-quarter earnings season in July. The S&P 500 climbed 2.4 percent on June 15 as investors focused on a level calculated from the index’s value over the last 200 days and is little changed in the four sessions since.

Failing to hold the level “could be a sign today’s reversal could have more downside pressure,” said Ryan Detrick, chief technical strategist at Schaeffer’s Investment Research in Cincinnati. “We don’t expect a major plunge, nor a break of the recent lows on the S&P 500 near 1,040. But after the strength of the past two weeks, some short-term weakness could happen.”

The S&P 500 completed its biggest two-week rally since November on June 18 after New York-area manufacturing expanded and Europe’s efforts to contain its debt crisis bolstered confidence in the global economy. The index has gained 6 percent since June 7, paring its loss since reaching a 19-month high on April 23 to 8.6 percent.

‘Interesting Zone’

“It is an interesting zone,” said Stephen Suttmeier, a vice president in U.S. technical and market analysis at Bank of America Corp. in New York. “Our main view is that if the S&P doesn’t take out 1,150, the bears remain in control.”

The S&P 500 slipped 0.4 percent to 1,113.20 at 4 p.m. in New York today after jumping as much as 1.2 percent in the first hour. Losses in retailers and computer makers spread to the rest of the market as the 50 percent recovery failed to hold.

The 1,150 level represents “key resistance” for the index because it’s where a rally ended on Jan. 19 and marks a 61.8 percent retracement of the decline from April 26 to May 26, Suttmeier said.

Technical analysts who use the Fibonacci ratios described by Leonardo of Pisa in “Liber Abaci” in 1202 believe the price of an asset may reverse an earlier gain or decline after reaching certain levels. Among those thresholds are the midpoint between an asset’s high and low points as well as levels marking the recovery of 61.8 percent, 38.2 percent and 23.6 percent of reversals of the previous trend.

Loss Retracements

The S&P 500 failed this year to achieve a 61.8 percent retracement of the bear market between Oct. 9, 2007, and March 9, 2009. It closed at 1,217.28 on April 23, its highest level of the year, missing that Fibonacci level by 0.7 percent.

The S&P 500’s 50-day average is another challenge facing stock bulls, Suttmeier said. Currently at 1,137.52, the index’s average over the past 50 trading days may be a point at which investors decide to sell, stopping the rally, he said.

“Traders are moving the market the right now, that’s why technical levels matter,” said Marc Pado, the San Francisco- based U.S. market strategist at Cantor Fitzgerald LP. “When you retrace a move 50 percent, it’s a resistance point. It’s one technical tool. What I like to see is several of them converge to create an opportunity. To say the market will fall further based on one level is too myopic for me.”