JPMorgan Says S&P 500 Will Bottom by May: Technical Analysis

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By Elizabeth Stanton

March 10 (Bloomberg) -- The stock market sell-off that sent the Standard & Poor’s 500 Index down 57 percent in 17 months will end by May after the benchmark falls as much as 11 percent more, according to JPMorgan Chase & Co.

Michael Krauss, the firm’s chief technical strategist, said the S&P 500 will fall to 650 points “within days,” a 3.9 percent drop from yesterday’s close. It will then rally for two to three weeks, gaining as much as 18 percent to 765, before dropping to a range of 650 to 600 by May. Technical analysts make predictions based on patterns in price charts and market data.

Krauss expects “a significant percentage rally” in the second half that could lift the benchmark by as much as 67 percent from its bottom to 1,000 by Dec. 31. That would give the index, off to its worst annual start ever following a 25 percent plunge, an 11 percent gain for 2009.

“We expect a major S&P 500 bottom in the 650-600 zone in the weeks ahead,” Krauss, who is based in New York, wrote in a report dated yesterday.

Krauss’s forecast that the sell-off will end in that range is based partly on a prediction that the S&P 500’s drop below 1,100 in October was the midpoint of its decline. He also uses the wave principle, a theory developed by accountant Ralph Nelson Elliott during the Great Depression. Elliott concluded that market swings, or waves, follow a predictable, five-stage structure of three steps forward, two steps back.

Krauss said his November prediction that the index would climb back to 1,100 by year-end “is too aggressive.” The “worst-case scenario” is a decline to 549, a level 65 percent below the October 2007 peak, Krauss said. That’s where a line drawn through the market’s 1942 and 1974 lows on a logarithmic scale intersects the current month. A weekly or monthly close below 549 “would prove us totally wrong,” he said.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net