Bloomberg News

S&P 500 Must Break Band to Signal Buying: Technical Analysis

December 13, 2011

Dec. 12 (Bloomberg) -- The Standard & Poor’s 500 Index is getting confined in a narrowing band between its 200-day moving average and a line of successive lows, and the best buying opportunity will arise only when it breaks out of that ceiling, according to Auerbach Grayson & Co.

The so-called coil pattern, formed by lower highs and higher lows, reflects investor indecision, and the S&P 500 remains vulnerable to volatility as long as it stays within that range, Richard Ross, a technical analyst at the New York-based brokerage, said.

Investors should “trade in the direction of the breakout,” buying stocks if the S&P 500 closes above 1,263, the 200-day moving average, or selling the index if it closes below about 1,175, which is on a trend line connecting the low on Nov. 29 with that of Oct. 4.

“The market is at a deadlock,” Ross said in a telephone interview today. “The coil is more indecisive. It speaks to that battle between the bulls and the bears. When you finally get a breakout from that coil, you win in a dramatic fashion and you really want to trade in that direction.”

The benchmark U.S. equity measure lost 0.9 percent this year through Dec. 9 and rebounded 14 percent from the Oct. 3 low. The S&P 500 hit its 200-day moving average three times this month during intraday trading, failing to close above it.

Volatility, as measured by the Chicago Board Options Exchange Volatility Index, also known as VIX, closed at 26.38 last week, 28 percent above its historical average of 20.56 since January 1990, Bloomberg data show.

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security or index.

--Editors: Srinivasan Sivabalan, Will Hadfield

To contact the reporter on this story: Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net


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