Chart Lovers Cite Bullish Signals to Predict Rally in Stocks

(Bloomberg) -- It’s been three months since the correction and stocks are still struggling to regain momentum. But for some technical analysts, the foundation for an upward break in stocks is all there in the charts.

Here are a few indicators they’re citing for that optimism:

200-DMA

The S&P 500 Index’s test last week of the 200-day moving average for the third time in 2018 could have been the charm that propels equity markets higher, according to Bank of America Merrill Lynch.

“The indicator weight of the evidence continues to favor the bulls,” technical analysts from the firm wrote in a note to clients Monday. “The bears have had their chances but have failed as the S&P 500 has tested, but not broken, its rising 200-day MA three times: February, April, and last week.”

RSI

Fundstrat Global Advisors’ Rob Sluymer cites the Relative Strength Index as reason for a potential recovery in the second quarter, noting that it’s recently ticked higher to neutral territory. The 14-day RSI, a commonly watched momentum indicator, indicates that stocks are oversold when it falls below 30. A reading of 70, on the other hand, often means they are overbought. Right now, it’s hovering around 50.

“A lot of these indicators were overbought at the beginning of January, and now we’re either back to neutral or oversold depending on which index or market or sector you’re looking at,” Sluymer said by phone, also noting the moving average convergence/divergence (MACD). “In the case of the S&P, it’s basically back to neutral.”

April Highs

Another key level chart-lovers are watching? Last month’s highs on the S&P 500. Should the index push through that resistance, a rush higher could follow.

“We’d need to break above the April highs of 2,710 (which would give it its first ‘higher-high’ since January) to confirm that the bulls are back in charge,” Matt Maley, an equity strategist at Miller Tabak & Co., wrote in an email to clients.

Doing the Wave

Isaac Gilinski, president of Miami-based Brickell Analytics LLC, is calling for a rally to 3,150 on the S&P 500. His firm uses wave analysis to measure market sentiment and predict future moves. Because the S&P 500 fell below 2,600 last week, that means the index has now started its fifth and final wave, he wrote to clients.

“Bear in mind the start to 3,150 may still be choppy,” Gilinski cautioned in a message.

©2018 Bloomberg L.P.

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