Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - May 21, '10

FTSE 100 index chart

In last week's analysis of the FTSE 100 index chart pattern, I had mentioned the possibility of the index breaching the support of the 200 day EMA once again. After closing exactly on the long-term moving average on Monday, the FTSE 100 managed a close marginally higher on Tuesday.

The bulls wilted in the face of an immediate bear attack. Higher volume selling first breached the 200 day EMA on Wednesday, and even the psychological 5000 level was broken intra-day on Friday. The index closed above the Feb '10 low of 5033, but lost 200 points on a weekly basis.

With the 20 day EMA falling quickly and resisting any pullback efforts, the Feb '10 low may not be able to provide strong support. A convincing close below it is necessary to extinguish the dwindling flicker of bullish hope.

The technical indicators are all looking bearish. The slow stochastic has dropped back into the oversold zone. The MACD is below the signal line and resumed its dive into deeper negative territory. The RSI and MFI are both below their 50% levels and heading downwards.

DAX index chart

The German DAX index chart is a good example of what happens when the authorities interfere with market dynamics because it seems to be good politics. The impressive recovery in the chart came to a shuddering halt as investors voted with their feet against the ban on naked short-selling.

The DAX made a lower top, quickly fell to the 200 day EMA and came within handshaking distance of breaching the low of 5655 made on May 7 '10. That would have formed a bearish 'lower top - lower bottom' pattern. Will it happen next week?

The technical indicators are suggesting as much. The MACD has gone beneath the signal line in negative territory. The RSI and MFI have faced resistance at the 50% level and are dropping down. The slow stochastic has also moved below the 50% level.

CAC 40 index chart

In last week's analysis of the CAC 40 index chart pattern, I had observed as follows:

'The 20 day EMA is about to drop below the 200 day EMA. The longer-term moving average has started to turn down. Both are very bearish indications.'

Even the 50 day EMA seems ready to drop below the 200 day EMA, which will complete the technical requirement for a bear market - in case any one had any doubts! Friday's intra-day low of 3342 breached the May 7 '10 intra-day low of 3350.

The MACD is below the signal line and resumed its down trend. The MFI and slow stochastic are on the verge of entering their oversold zones. The RSI is below the 50% level and moving down. Looks like the bulls have thrown in the towel.

Bottomline? The chart patterns of the European indices are showing the effects of the sovereign debt problems that have been swept under the carpet but not resolved. The stock market dislikes uncertainty. Unless the economic fundamentals show signs of improving, this could be a long summer of discontent. Stay in cash. Time for cherry-picking may not be too far away.