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Monday, January 24, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jan 21, ‘10

S&P 500 Index Chart

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The S&P 500 index chart pattern touched another new high of 1296 on Jan 18 ‘11, and closed at 1295 on strong volumes. The bulls seemed to pause for breath after a hectic rise from the Nov ‘10 dip. The index slipped to 1271 before close absolutely flat for the week at 1283.

The negative divergences in the technical indicators seem to have stalled the bull rally for the present. The MACD and slow stochastic made flat tops and the RSI made a lower top as the index rose to a new high. Will there be a deeper correction in the index? The possibility can’t be ruled out because of technical and fundamental reasons.

The S&P 500 index is still trading well above the rising 50 day EMA, and the gap between the 50 day and 200 day EMAs is widening. Such a situation is usually a harbinger of a correction. The MACD is positive, but has slipped below its signal line. Both the slow stochastic and RSI remain above their 50% levels, but have dropped sharply from their overbought zones.

Jobless claims fell by 37000, which was better than expected. Existing home sales rose more than expected. IBM and Apple declared great results. Despite the good news, the index failed to move up – which is a bearish sign. A drop to the 50 day EMA should not come as a surprise. The dip should provide a buying opportunity.

FTSE 100 Index Chart

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In last week’s analysis of the FTSE 100 index chart pattern, I had mentioned the possibility of a correction or consolidation due to the weakness visible in the technical indicators. What happened last week was a technical analyst’s delight.

The FTSE 100 rose to 6066 and closed at a new closing high of 6056 on Jan 18 ‘11 on good volumes. The next day, the index rose higher to 6077, fell short of the Jan 6 ‘11 top of 6090, and closed lower on higher volumes. A bearish ‘reversal day’ pattern (higher high, lower close) got formed.

On Thurs. Jan 20 ‘11, the FTSE 100 dropped sharply and closed just below the rising 50 day EMA on much higher volumes. A high volume bounce up on the last day of the week could not prevent the index from closing below the 5900 level – more than 100 points lower on a weekly basis.

The technical indicators have weakened considerably. The MACD is still positive, but has dropped well below its signal line. The slow stochastic has slipped into the oversold zone. The RSI fell below the 50% level, but managed to regain its mid-point by the end of the week. Such corrections are good for the sustainability of the bull market, and a further dip to the 5800 level will be a buying opportunity.

Bottomline? Both the S&P 500 and FTSE 100 indices are facing bull market corrections. Such corrections provide buying opportunities. But there is no need to throw caution to the winds. Maintain judicious trailing stop-losses to preserve profits.

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