Monday, January 31, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jan 28, ‘10

S&P 500 Index Chart


In last week’s analysis of the S&P 500 index chart pattern, I had given technical and fundamental reasons that pointed to a likely correction. While the correction hasn’t quite happened yet, the market is likely to head downwards.

The S&P 500 rose smartly through the week and touched a new high of 1303 on an intra-day basis on Fri. Jan 28 ‘11, but gave up all the gains by forming a bearish ‘reversal day’ pattern (higher high, lower close) on strong volumes. It closed the week at 1276 - 7 points lower on a weekly basis.

All three technical indicators made lower tops while the index reached a higher one. The combined negative divergences are likely to drag the index down. The MACD is positive, but falling below the signal line. The slow stochastic has dropped from the overbought zone. The RSI has been making a series of lower tops and lower bottoms as the index climbed higher, and is poised just above the 50% level.

Real GDP (net of inflation) grew 3.2% in Q4, which was lower than estimates but higher than 2.6% in Q3 and 1.7% in Q2. Consumer spending grew 4.4% in Q4 vs. 2.4% in Q3. But unemployment remains at 9.4% and jobless claims hit 454000, which was about 50000 higher than estimates. The economy is recovering, but the stock markets appear to have run ahead too far.

Friday’s sell off was attributed by some to the turmoil in Egypt. Markets tend to correct after hitting new tops, and Egypt was just the excuse for doing so. A correction down to the rising 50 day EMA (or even a little lower) will restore the health and sustainability of the bull market. Investors may want to take some profits off the table, and re-enter at lower levels. 

FTSE 100 Index Chart


The FTSE 100 index chart pattern bounced up nicely from the support of the rising 50 day EMA and even managed to clear the 6000 level intra-day on Wed. Jan 26 ‘11. But all the good work by the bulls was spoiled by a high volume ‘distribution day’ on Fri. Jan 28 ‘11. The index slipped below the 5900 level and the 50 day EMA and closed the week at 5881 – another lower weekly close.

The technical indicators are looking bearish and pointing to further downward movement. The MACD is barely positive, and well below the signal line. The slow stochastic bounced up nicely from its oversold zone to reach the 40% level, only to reverse direction. The RSI unsuccessfully tried to regain the 50% level, and has started to move down.

Note that the 200 day EMA is rising and the index is trading more than 200 points above it. That means the bulls are alive and kicking. However, a drop below the Jan 20 ‘11 low of 5867 will form a bearish pattern of lower tops and lower bottoms. So, investors should remain cautious.

Bottomline? The S&P 500 and FTSE 100 indices are in the midst of bull market corrections. This may be a good time to get rid of the weaker stocks in your portfolio. Lower index levels may provide better entry points.

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