Last week, the FTSE 100 index chart pattern seemed to have moved up too fast in a rush to conquer the resistance of its 200 day EMA. I had observed as follows:-
'The only note of caution is the rapid rise of the index above its 20 day EMA. Every time it has done that in the past 6 months - in Dec '08, Jan '09 and Apr '09 - it has fallen back to take support on the short-term average.'
The 3 months closing chart pattern shows the FTSE 100 index came to its senses, as if realising that an up move can be sustained only through a series of corrections:-
(Please right-click on the image above; open it in a new tab or window for a better view.)
The 200 day EMA provided strong resistance and pushed the index down towards its 20 day EMA, just like it had done a few times earlier. Such similarity of patterns often lead analysts to state that 'history repeats itself.' It doesn't, of course. Only the patterns repeat.
The slow stochastic slid a little below the overbought zone. The MACD is still positive and above its signal line. But the ROC has moved down in tandem with the index. The RSI has also slipped from the overbought zone.
Volumes appear OK, but nothing great. Higher volume on a down day followed by lower volume on an up day isn't boosting confidence. The correction may continue for a bit longer.
Bottomline? A decent correction in the FTSE 100 index chart pattern is just what the doctor ordered. Investors can use this dip to enter. The underlying fundamentals of the economy continues to remain weak.
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