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Monday, December 20, 2010

Stock Index Chart Patterns – Dow Jones (DJIA) and FTSE 100 – Dec 17, ‘10

Dow Jones (DJIA) Index Chart

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Last week, I had expected the Dow Jones (DJIA) index chart pattern to reach a new high sooner than later. On Thu. Dec 16 ‘10, the index touched a new intra-day high of 11554 and closed at 11499. The Nov 5 ‘10 closing level of 11444 has been overcome. The bulls ought to be celebrating, but where is the champagne?

The technical indicators show that the bears may be planning their own celebrations. The transaction volumes on Dec 16 ‘10 were considerably less than those on Nov 5 ‘10. New highs on the MACD and slow stochastic are conspicuous by their absence. The RSI is in the overbought zone – a place where it doesn’t like to stay for long. The widening gaps between the 50 day and 200 day EMAs may lead to another round of correction and consolidation.

The economy is in better shape than it was around this time last year. Housing starts and unemployment numbers showed slight improvements. But the market’s bullish sentiments are indicating a return back to glory days. The bullishness seems a bit overdone. Stay invested, but maintain trailing stop-losses to conserve profits.

FTSE 100 Index Chart

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The FTSE 100 index chart pattern is throwing up intriguing possibilities. The index touched a new intra-day high of 5907 on Dec 16 ‘10 and closed at 5891 on Dec 14 ‘10 – both levels marginally higher than the Nov ‘10 levels, but on lower volumes. New highs are usually accompanied by higher volumes.

The slightly higher levels in the FTSE saw much higher levels on the slow stochastic and RSI. That should normally indicate a positive divergence. Note that the MACD is displaying negative divergence. Also, the lower volumes during the Dec ‘10 top leaves open the possibility of a bearish double-top formation.

The double-top will not get confirmed unless the index drops below the Nov ‘10 low of 5519 – and it seems unlikely at this point. The Eurozone sovereign debt problems haven’t been solved yet. That can rear its head and spoil the bull party at any time. But those are ‘may be’s.

The current trend is bullish with the FTSE making higher tops and higher bottoms. Investors need to be aware of the likely problems, and ride the trend with suitable stop-losses.

Bottomline? The chart patterns of the Dow Jones (DJIA) and FTSE 100 indices reached new highs last week, as expected. Some amount of hesitation and consolidation near new highs is also expected. Stay invested, and maintain trailing stop-losses.

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