S&P 500 to Rise 13% on ‘Confirmed Breakout’: Technical Analysis

Share Business ExchangeTwitterFacebook| Email | Print |A A A

By Lu Wang

March 30 (Bloomberg) -- The Standard & Poor’s 500 Index,heading for its biggest first-quarter gain since 1998, willprobably rise 13 percent in the next few months after staging a“confirmed breakout,” says Katie Stockton of MKM Partners.

The benchmark measure of U.S. equities closed above itsJanuary high of 1,150.23 for two consecutive weeks on higher-than-average trading volume, after failing to stay above thatlevel in the previous week. That breakout confirms the S&P 500has entered a new phase of its yearlong rally and may reach1,325, said Stockton, who boosted her projection from between1,220 and 1,230.

“The breakout was decisive,” Stockton, chief markettechnician at Greenwich, Connecticut-based MKM Partners, said inan interview. It indicates “the trend will persist at itscurrent rate,” she added.

Stockton based her new projection on what’s called themeasured move technique, which says a security’s future advancetends to be equal in length to the rally that precedes it. Shesees even more gains in the longer term: Using the S&P 500’sadvance from its July low to its January high as the reference,Stockton said the index may gain the same amount, or about 270points, from its February low of 1,056.74, in the next five tosix months.

The index yesterday extended gains from a fourth straightweekly advance, after consumer spending increased for a fifthmonth and European confidence in the economic outlook improved.It has climbed 4.9 percent since Dec. 31, which would be thebiggest first-quarter rally since 1998.

Put/Call Ratio

Stockton said she expects the market to retreat in theshort term, because investors are too bullish. The ratio of putsto calls on U.S. equities dropped to 0.40 on an intraday basison March 25, the lowest level since Jan. 11. Calls convey theright, without the obligation, to buy a security at a set priceby a given date. Puts give investors the right to sell.

During the S&P 500’s 73 percent rally from a 12-year low inMarch 2009, the put/call ratio sank below 0.40 on fouroccasions, all of which were followed by declines ranging from 3percent to 7.9 percent, according to Bloomberg data.

“Sentiment is still somewhat complacent and is supportivefor a pullback,” Stockton said. “The confirmed breakoutsuggests the pullback will be more modest than I had originallyexpected.”

The S&P 500 may slide to 1,120, its average close duringthe past 50 days, she said. Previously, she called for the indexto sink toward its 200-day average of 1,058.