S&P 500 breaks key uptrend line on Goldman jitters

By Ellis Mnyandu

NEW YORK (BestGrowthStock) – The S&P 500 breached a key technical level on Friday as uneasiness over fraud charges against Goldman Sachs (GS.N: ) curbed risk appetite and investors weighed the possibility of a big reversal in the U.S. stock market.

The key development from Friday’s market slide was the violation of the Standard & Poor’s 500’s(.SPX: ) uptrend line from the February 5 closing low to the 19-month closing peak on Thursday, April 15.

On Friday, the benchmark S&P 500 ended at 1,192.13 — down 1.6 percent from the previous day’s closing high.

The violation of the uptrend followed a two-day closing stretch where the S&P 500 finished above the psychologically important 1,200 level.

Before Friday, market technicians had their sights set on critical resistance in the area of 1,225 to 1,228, representing the 61.8 percent Fibonacci retracement of the decline from a record high in October 2007 to a 12-1/2-year closing low in March 2009. The Fibonacci number is a widely used technical tool that can help identify the point at which asset prices will reverse.

The news on Goldman Sachs “is a blindside hit that the market is trying to absorb and adjust to on a Friday. It could trigger the start of a more significant correction, but being on the leading edge of earnings, I don’t think there’s really a way of telling that,” said John Schlitz, chief U.S. market technician at Instinet, a global agency-only broker that trades roughly 4 percent of the total daily U.S. equity volume.

On the Dow, the key downside levels to watch for are 10,800 to 10,825, Schlitz said, while on the S&P 500, the level to watch was 1,175.

“The S&P 500 level is not so much a number that if you penetrate, you are going to fall apart. But it’s a number that if we do penetrate and can’t get back above it, then this will start to be a more cautionary sign,” Schlitz said.

BEWARE THE ‘EVENING STAR’

Tom Fitzpatrick, chief technical analyst at CitiFX, said Friday’s set-up on the S&P 500 and the CBOE Volatility index (.VIX: ), a barometer of investor fear, suggested that short-term caution was now warranted.

The VIX jumped 15.5 percent on Friday when the three major U.S. stock indexes tumbled in the heaviest volume of the year on the Goldman charges.

“The equity market continues to perform well, but we could be set for a 48- to 72-hour hiccup,” he said in a note. “If we were to close anywhere around 1,200 the daily pattern would look very much like an ‘evening star’ formation and suggest the potential for further losses.”

An evening star formation is a pattern used by traders as an indication that an uptrend is about to reverse.

Fitzpatrick noted that the VIX chart formation was now almost identical to that seen in January, which coincided with a drop in the S&P 500 of 50 points in two days. That correction took the S&P 500 down as much as 8.1 percent through the close on February 8.

“Only if we were to decisively break back below 1,150 on the S&P 500 would we be concerned about a deeper correction.”

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(Reporting by Ellis Mnyandu; Editing by Jan Paschal)

S&P 500 breaks key uptrend line on Goldman jitters