Monday, February 7, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Feb 04, ‘11

S&P 500 Index Chart


The S&P 500 index chart pattern is a clear example of why technical analysis is not a science, and should be treated as a decision making tool that isn’t 100% foolproof. The big sell-off on Jan 28 ‘11 was accompanied by weakness in the technical indicators, which pointed to a likely correction down to the rising 50 day EMA. No such thing happened.

The bulls took just two trading sessions to wipe out the fall. The index closed above the 1300 level four days in a row last week, touching another new high of 1311 on Fri. Feb 4 ‘11. The technical indicators are beginning to turn bullish. The MACD has inched above its signal line in positive territory. The slow stochastic has jumped back into the overbought zone. The RSI bounced up from the 50% level and is trying to hang on to the 60% mark.

The bears are not completely out of the game. The distance between the 50 day and 200 day EMAs is widening, and the index is trading 50 points above the 50 day EMA. These are warning signs of an impending correction. All three technical indicators failed to make new highs with the index. The combined negative divergence is a bearish sign. Looks like the S&P 500 wants to defy gravity, and one should not try to argue against that. Maintain trailing stop-losses and stay invested.

The market seems to be discounting the economic recovery too much in advance. The housing market keeps contracting. The unemployment rate fell to 9%, but there were only 36000 jobs added in Jan ‘11. Many people are starting home-based businesses due to lack of employment opportunities. Much more needs to be done to improve job growth, otherwise the economic growth will remain tepid at best. 

FTSE 100 Index Chart


The FTSE 100 index chart pattern spent an entire day below the rising 50 day EMA, and touched an intra-day low of 5815 on Mon. Jan 31 ‘11. That formed a bearish lower tops and lower bottoms pattern. Just when the bears were getting ready to dominate, the bulls mounted a strong counter attack. The index moved above the 50 day EMA and closed the week just below the 6000 level.

Note that the slow stochastic made a higher bottom while the index touched a lower one – a positive divergence that helped the index to pullback. The indicator is looking bullish as it has risen above the 50% level. The RSI has risen to its 50% level. The MACD bounced off the ‘0’ line, and is about to cross above the signal line. The bulls are back in command and the index should resume its up move.

Bottomline? The single day’s sell-off in the S&P 500 index chart and a decent correction in the FTSE 100 index chart have been followed by a resumption of the bull markets. Institutional investors appear to be booking profits in emerging markets and redeploying in the developed markets. At some point in time, the valuation gap between the two will reduce sufficiently for a proper correction. Till then, enjoy the ride.

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