Fibonacci Level Hit as S&P 500 Erases 61.8% of Drop

(Bloomberg) -- The Standard & Poor’s 500 Index’s rally today helped reverse 61.8 percent of its plunge from October 2007 to March 2009, a positive signal to analysts who study price and volume chart patterns.

The benchmark index for American equities rose as much as 1 percent to 1,235.05 earlier, its highest level since Sept. 22, 2008, after President Barack Obama agreed to extend tax cuts and the U.S. Treasury Department sold its remaining stake in Citigroup Inc. Gains in April and November stalled before the index crossed 1,228.74, the 61.8 percent retracement level.

The threshold is part of Fibonacci chart analysis, which attempts to identify points where advances may gain momentum or falter. The difference between high and low points is divided into stages using levels such as 23.6 percent, 38.2 percent and 61.8 percent.

“If you can get above it and hold above it, it builds confidence, and it sets you up for eventually attacking the next resistance level,” said John Schlitz, the New York-based chief U.S. market technician at Instinet Group Inc., which handles about 4 percent of daily U.S. stock trading.

The Fibonacci ratios identified by 13th century mathematician Leonardo of Pisa correspond to proportions found in nature. In technical analysis, a stock that has recouped 61.8 percent of a decline is viewed as more likely to recover completely.

Resistance

“Overbought” conditions in the U.S. stock market may need to subside further before the S&P 500 reaches its next major resistance level at about 1,313, Schlitz said. That level is where a rebound stalled in August 2008 before the index began the steepest part of its descent, he said.

“Every major index is coming into today with a stochastic above 90,” Schlitz said, referring to a system of measuring prices relative to a recent range on a scale of 1 to 100. “I don’t think people are going to go too crazy just because we get a couple of closes above the 61.8.”

The S&P 500 reached a record 1,576.09 during Oct. 11, 2007. It tumbled to an intraday low of 666.79 on March 6, 2009, as bank losses stemming from the collapse of the U.S. subprime mortgage market caused a global recession. The index has gained more than 4 percent in the past week amid signs the economy is responding to fiscal and monetary stimulus.

“It’s a bullish development, and something that has to happen if we’re going to continue to see the market moving higher,” Walter “Bucky” Hellwig, a Birmingham, Alabama-based senior vice president at BB&T Wealth Management, said of the advance. “It’s a technical resistance point, and it seems to be overridden by the fact that monetary policy and now the tax-cut extension could produce better GDP growth.” BB&T oversees $17 billion.