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Sunday, April 18, 2010

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - Apr 16, '10

FTSE 100 index chart


The FTSE 100 index chart had a mild correction a week back that got support from a rising 20 day EMA. The index continued its bull rally on rising volumes and made a new high of 5834 on Friday, Apr 16 '10. Then came a bolt from the blue - the news of the SEC fraud charges against Goldman Sachs.

The FTSE 100 index dropped to the 20 day EMA on heavy volume and closed just above it (unfortunately the chart has not been updated with Friday's trade). That formed a 'reversal day' pattern (higher high and lower close) and the index closed about a half-percent lower on a weekly basis.

Next week's trading will be interesting. Note how all the technical indicators have made lower tops while the FTSE made a new high. This is what I had written last week:

'The negative divergence, combined with low volumes and the widening distance between the 50 day and 200 day EMA may be signalling a healthier correction in the near future.'

The Goldman fraud news may be just the trigger that the bears will use to pounce upon the charging bulls.

DAX index chart


The bull charge at the German DAX index came to a screeching halt, thanks to the Goldman fraud news. A huge volume spike (not updated in the chart), last seen 4 weeks back on another down day, caused the index to drop down to the 20 day EMA for support. The DAX ended up with a lower weekly close below the 6200 level.

The index made a new high of 6311 on Thursday, Apr 15 '10 - but the technical indicators failed to follow suit. The negative divergences could well lead to a decent correction. The similarity between the technical indicator patterns, back in Jan '10 just prior to the correction and now, should be noted.

Remember that technical analysis is not a science and there is no certainty that the index will correct next week. It may use the support from the 20 day EMA to bounce up again. So short the market at your own peril.

CAC 40 index chart


The CAC 40 chart pattern missed going past its Jan '10 high of 4088 by the proverbial whisker before the Goldman news poured cold water on the bull party. The index dropped below the 4000 level and the 20 day EMA on strong volumes, for a lower weekly close.

The MFI continues to be the weak link as it remained below the 50% level throughout the week. The MACD, RSI and slow stochastic have all started to move down.

Bottomline? The chart patterns of the European indices all exhibited similar high volume down days after the Goldman Sachs fraud news hit the markets. That could trigger off a bigger fall. Shorting a bull rally is always a risky affair. Book part profits, and await the market moves next week.

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