S&P 500 Retreat Signaled by ‘Bearish Wedge’: Technical Analysis

By Sapna Maheshwari

Oct. 22 (Bloomberg) -- The Standard & Poor’s 500 Index may drop at least 7.5 percent based on a “bearish ascending wedge” pattern, according to Tom McNally, a money manager at Wilbanks, Smith & Thomas.

Drawing a so-called “bottom trend line” from the S&P 500’s 12-year low on March 9 and a “top trend line” from its close on May 8, at the time a four-month high, creates a nearly complete bearish ascending wedge, McNally said. The pattern usually signals stocks are about to retreat and hasn’t preceded a rally in at least five years, he said.

“If this one breaks, I think it’s going to be another bear rally where we’re going to go back to at least 1,000 or so,” McNally, who helps oversees $1.3 billion in Norfolk, Virginia, and allocates assets based on technical indicators, said in a telephone interview. “For me, I’m starting to lighten up on the equities in my account.”

The S&P 500 fell 0.9 percent to 1,081.40 yesterday, its steepest decline in almost three weeks. The benchmark index has not closed above 1,100 since Oct. 2, 2008. Its 60 percent rally from March 9 through yesterday represents a so-called parabolic advance, a surge which tends to lead to a parabolic decline, McNally said.

“We’re losing momentum, the market appears to be overbought, we’re having a tough time getting through 1,100 and got this ascending wedge pattern,” he said. “A lot of guys are watching this, and typically when that happens, people tend to jump ship at the same time.”

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

To contact the reporter on this story: Sapna Maheshwari in New York at smaheshwar11@bloomberg.net.