Friday, August 7, 2009

FTSE 100 Index Chart Pattern - Aug 6, 2009

Quite a sea change in the five weeks since my last look at the FTSE 100 index chart pattern and perhaps a lesson why one should respect the market and not depend totally on technical analysis.

This is what I had mentioned in my earlier post:

'Once the 20 day EMA moves below the 50 day EMA, the index will be conclusively back in the bear market. Desperate efforts by the bulls to keep the index supported at the 4200 level seems doomed to failure.'

Let us see what actually happened. The 3 months bar chart pattern of the FTSE 100 index made an astonishing turnaround:


The support at the 4200 level was broken and the 20 day EMA slipped slightly below the 50 day EMA. So far, so good. But instead of reverting back to a bear market, the FTSE had a 'reversal day' on Jul 13 '09, hit a low of 4100, jumped up with renewed vigour and had 11 straight days of gains.

What happened on Jul 13, '09 that made the FTSE 100 change directions so suddenly? Good question. I can only say what didn't happen. The economy didn't miraculously make an overnight improvement.

The 20 day EMA is now above the 50 day and 200 day EMAs. The 50 day EMA has its nose above the long-term moving average and all three averages are moving up. There should be no further doubts about the bull market.

The volumes did not increase sufficiently, which means the up move initially happened on short covering by the bears. Of late, volumes have picked up, but higher volumes on down days is not inspiring confidence.

The slow stochastic has remained in the overbought zone for nearly three weeks and could stay there a while longer. The MACD is positive and above the signal line. The RSI is in the overbought zone but moving down. The ROC has started to move down and showing negative divergence.

Bottomline? The economic recovery is going to take a long time. The FTSE 100 index chart pattern is reflecting bullishness borne of expectations of an early recovery. Time to be cautious. Enjoy the ride, but maintain trailing stop-losses.

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