Bloomberg News

S&P 500’s ‘Triangle’ Bodes Well for Bulls: Technical Analysis

November 17, 2011

Nov. 17 (Bloomberg) -- The Standard & Poor’s 500 Index has formed a “triangle” pattern, a sign to analysts who study charts that the rally is about to resume after the benchmark gauge for U.S. stocks rose as much as 20 percent last month.

The S&P 500’s trading range has narrowed since October, as the index stalled after rising to its average level over the past 200 days. Based on the size of this triangle pattern, the index may climb as high as 1,430, said Craig W. Johnson, a technical market strategist with Piper Jaffray Cos.

“A triangle or a pennant formation forms during the middle part of a move, and typically these patterns resolve themselves in the direction of the preceding trend,” Johnson, based in Minneapolis, said in a telephone interview yesterday. “That would suggest that this is ‘the pause that refreshes’ before we get the next leg up.”

The S&P 500 recovered after sinking to as low as 1,074.77 on Oct. 4, posting the best monthly performance since 1991, as European leaders took steps to contain the region’s debt crisis and American companies beat earnings forecast for 11th straight quarter. The rebound peaked at 1,292.66 on Oct. 27, lifting the index above its 200-day average for the first time since August.

The advance has since fizzled as the index was unable to remain above its 200-day average amid concern surging Italian bond yields showed Europe’s crisis is intensifying. The S&P 500 has fluctuated around its year-end 2010 close of 1,257.64 during the period, failing to close with a year-to-date gain for more than two straight days.

Tension Building

“The range is compressing and it’s building tension in the market,” Jay Lefkowicz, a technical strategist at Concept Capital Markets LLC in New York, said in a telephone interview yesterday. “The resolution out of the pattern will be fast and fierce.”

Lefkowicz said he expects the market to resume gains because 120 of the 800 stocks that he follows are sending buy signals while 60 are flagging sells.

“There are many more stocks showing bullish patterns versus stocks showing bearish patterns,” he said. “There is a significant bias to the long side.”

The 200-day average, at the top of the triangle pattern around 1,272, poses a big barrier to further gains, according to a note co-written by John Schlitz, chief U.S. market technician at Instinet Group Inc.

Lower Boundary

The average is “making it much more difficult for the pattern to be resolved positively,” Schlitz wrote yesterday. “Another failure at the 200-day line would not be well received and a violation of the lower boundary of the triangle would open risk to the 50-day moving average near 1,200.”

Piper Jaffray’s Johnson is optimistic. He forecast the S&P 500 will end this year at 1,350, a 9.1 percent gain from yesterday’s close of 1,236,91.

“This triangle pattern is even more bullish than what I had thought,” he said. “Once you get a close above the 200-day moving average, that’s when you’ll start to see a lot of investors who have been pessimistic turn more positive and put more money back to work.”

--Editors: Stephen Kleege, Joanna Ossinger

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net; Kaitlyn Kiernan in New York at kkiernan2@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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