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S&P 500 index flashes bullish signal to chart-watchers

June 15, 2010 |  4:31 pm

Stocks worldwide continued to rebound Tuesday, lifting key U.S. market indexes back into the black for 2010.

Although analysts naturally cited waning worries about the economy, many bulls were more interested in what was happening on market charts.

Specifically, the Standard & Poor’s 500 index closed above its 200-day moving average trendline, a key technical level where rallies had halted for the last 2 1/2 weeks.

The S&P rose 25.60 points, or 2.4%, to close at 1,115.23, topping its latest 200-day moving average reading of 1,108.68. As the chart below shows, the index had been below its 200-day trendline (the yellow line) since May 20.

Spxchart The moving-average line “is what everyone has been focused on,” said Gail Dudack, a technical analyst who heads Dudack Research in New York.

Why the obsession with the charts? Because, for better or worse (and probably worse) the market is largely hostage to momentum traders, who just want to play the prevailing trend -- up or down. Closing above the 200-day trendline is a potential momentum-changer.

As Peter Sorrentino, a money manager at Huntington Asset Advisors in Cincinnati told Bloomberg News: “Technical analysis has become increasingly important because of so much money chasing around. The momentum of money has become more important than the fundamentals beneath it.”

(Does anyone hear Benjamin Graham crying out from beyond the grave?)

Also encouraging the bulls on Tuesday: The S&P 500, the Dow Jones industrial average and other indexes broke the recent pattern of lower highs and lower lows -- meaning, each rally had peaked at a lower level than the previous one, and each sell-off had sent prices to lower levels than the previous sell-off.

At its close Tuesday of 1,115.23, the S&P was at its highest level since May 18. It’s now up 0.01% year to date, and down 8.4% from its 2010 high reached April 23.

For those who still prefer to take their cues from the fundamentals, Dudack cited the 2.8% surge in the tech-dominated Nasdaq composite index. The Nasdaq has rebounded 6.8% since Wednesday.

“Tech is really the core market leadership, because it represents an area that can do well” if the economic growth continues, Dudack said.

In other words, a sustained recovery should mean higher business capital spending, which should be good for many tech companies.

The one major disappointment Tuesday, as usual lately on rally days: U.S. trading volume remained relatively anemic, suggesting a lack of conviction.

-- Tom Petruno