Oct. 19 (Bloomberg) -- The Standard & Poor’s 500 Index will probably decline over the next two weeks because the gauge’s 14 percent rally from an intraday low on Oct. 4 was too steep, according to UBS AG technical analysts.
“The recent rally was too steep to be sustainable, which from a momentum basis alone suggests a near-term breather before seeing more strength deeper into the fourth quarter,” Michael Riesner and Marc Muller wrote in a note dated Oct. 18. “Given the fact that the first rally leg was stronger than expected, it is likely we will also see a positive surprise into later November.”
The S&P 500 reached an intraday high of 1,233.1 yesterday, surpassing a level that UBS predicted the index wouldn’t reach until late next month. Stocks gained on optimism that European leaders will agree on how to solve the region’s debt crisis.
The analysts forecast the U.S. gauge will lose as much as 6.2 percent to 1,150 in late October or the first week of November from yesterday’s close, before rallying to 1,270 to 1,280 in late November.
The low reached earlier this month forms the basis for a “corrective A-B-C counter trend rally,” where a gauge climbs, drops and then rallies for a second time, according to the analysts.
As the S&P 500 rebounded more strongly than UBS had estimated, “we have a first tiny piece of evidence that the whole rebound pattern could finally take a different shape than that of a classic A-B-C, where wave C takes out the high of wave A,” Riesner wrote. “Either the whole pattern will turn into just a volatile sideways trading range, where wave B would be a strong setback, or the whole rebound pattern will be significantly shorter than expected, which means the late November top could be more important than we think.”
In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.
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