(Updates with DeMark comments on short covering, termination of short-term market rally from sixth paragraph.)
Oct. 5 (Bloomberg) -- A 3.8 percent rally tomorrow in the Standard & Poor’s 500 Index would create a pattern that may result in a “sharp decline” a day later, according to Tom DeMark, the creator of indicators for identifying turning points in securities.
“Tomorrow is a very important day for us,” DeMark said in an interview on Bloomberg television’s “Street Smart” hosted by Lisa Murphy and Adam Johnson. “We’ve just got to monitor closely tomorrow’s trading. If it’s very strong and if the news on Friday is either positive or negative, we could have sharp decline to undercut yesterday’s low.”
The stock index closed at 1,144.03 today, and would send a bearish sign if it reached 1,188 tomorrow, he said.
“People are not smart off of market bottoms,” DeMark said. “If you do get three up closes off a low, we’ll see a vacuum in the market and that vacuum will accent the decline even more than the upside.”
DeMark, the founder of Market Studies LLC, said on Sept. 22 that the S&P 500 might fall as low as 1,076 before investor panic abated and stocks advanced. The benchmark index for American equities fell yesterday to 1,074.77 and has gained 6.4 percent since. On Aug. 16, DeMark said European banks were “bottoming” and Societe Generale SA and BNP Paribas SA “look like buys.” Societe Generale has plunged 22 percent and BNP 21 percent since.
“We are at a pivotal and crucial point right now,” DeMark said today. “The market short-term reacted too aggressively yesterday and it almost indicates that the market could be responding more to short covering than real investing.”
Stocks reversed losses yesterday, rallying in the final hour of trading, amid speculation European Union officials are examining how to recapitalize the region’s banks. The S&P 500 extended its loss to more than 20 percent intraday, meeting the common definition of a bear market, before rebounding.
“Typically when markets have three up closes and do move that quickly, that is a sign of the termination of a short-term move,” Demark said. “Instead of looking forward and expecting the market to move higher, it could have a very sharp decline.”
--With assistance from Lu Wang in New York and Michael Patterson in London. Editors: Chris Nagi, Nick Baker
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