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Sunday, August 29, 2010

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX – Aug 27, '10

FTSE 100 Index Chart

FTSE_Aug2710

The 3 months closing chart pattern of the FTSE 100 index mostly has bad news for the bulls. So, let me start with good news. After falling below the 5100 level intra-day on Wed. Aug 25, ‘10, the index moved up on Thursday and Friday on increasing volumes to close just above the 5200 level. The FTSE 100 actually gained 6 points on a weekly basis.

Before the bulls get enthused and start to plan a new rally, here is a litany of bad news. Monday’s close of 5235 was the highest of the week on the lowest volumes. The resistance from the confluence of the three EMAs proved too strong for the index. Volumes picked up during the 125 point drop to Wednesday’s close of 5109 – a sign of distribution.

The 20 day and 50 day EMAs have both slipped below the 200 day EMA with the FTSE 100 below them. Sign of a bear market. The slow stochastic has just emerged from the oversold zone. The MFI has moved up to the 50% level. The RSI is below the 50% level. The MACD has stayed below the falling signal line for two weeks and has turned negative.

Any up moves are likely to face resistance from the three EMAs and the down trend line joining the tops made on Aug 9 ‘10 (5410) and Aug 17 ‘10 (5350). Watch the July 1, ‘10 low of 4790 closely. A fall below can take the FTSE 100 much lower.

DAX Index Chart

DAX_Aug2710

This is what I had surmised about the behaviour of the DAX index chart pattern in last week’s analysis:

“A bearish ‘lower top – lower bottom’ pattern is compounded by another bearish head-and-shoulders pattern that can lead to a dip below the long-term moving average.

Previous forays below the 200 day EMA have been brief, followed by sharp recoveries. So, there is no need to rule out a similar bounce back by the bulls yet.”

Readers may think that I am a professional soothsayer masquerading as a technical analyst. The fact is, it was an educated guess that worked. The DAX dropped below the 200 day EMA on Tuesday, Aug 24, ‘10 but stayed below the long-term moving average for just 3 days – much like it had done in early July ‘10.

On Friday, the DAX moved up to close almost exactly on the 200 day EMA. What next? The technical indicators are hinting that any up move may peter out near the falling 20 day and 50 day EMAs. Monday’s highest close of 6011 was accompanied by the lowest volumes of the week, while Wednesday’s lowest close of 5899 had the highest volumes. Not your typical bullish behaviour.

The MACD is negative and below the signal line. The RSI and MFI are both below their 50% levels. The slow stochastic is in the oversold zone. Technically, the DAX is still in a bull market – but the bulls are on shaky ground. The MACD, RSI and MFI have made lower bottoms than the ones made in Jul ‘10, while the DAX has made a higher bottom. A negative divergence.

CAC 40 Index Chart

CAC_Aug2710

The CAC 40 index chart pattern shows the final confirmation of a bear market. The 20 day EMA has dropped below the 50 day EMA, and all three EMAs are moving down with the index below them.

The MACD is negative and below the signal line. The RSI and MFI are below their 50% levels. The slow stochastic is in the oversold zone. The index has made a much higher bottom than the one made in Jul ‘10, but not well supported by the technical indicators.

Any pullback effort by the bulls is likely to stall near the falling 20 day and 50 day EMAs.

Bottomline? The bears have tightened their grip further on the European indices. Sell on rises should be the tactic for the FTSE 100 and CAC 40. Very selective buying on a clear move above the 200 day EMA for the DAX.

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