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Monday, March 14, 2011

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

S&P 500 Index Chart

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In last week’s analysis, the bull market in the S&P 500 chart was going strong, with the index trading above the rising 50 day and 200 day EMAs. But the turmoil in the Middle East and North Africa had pushed up oil prices that led me to advise caution. The index drifted down to close below the 1300 level and the 50 day EMA on Thu. Mar 10 ‘11 – its first close below the medium-term moving average in more than 6 months. Even more worrisome for the bulls were the high volumes.

Despite the horrific news and visuals of the earthquake and tsunami in Japan, the S&P 500 managed to close above the 1300 level and the 50 day EMA on Fri. Mar 11 ‘11. But it lost more than 1% on a weekly basis, and formed a bearish ‘lower tops and lower bottoms’ pattern. From the Feb ‘11 top of 1344 the correction has lasted 3 weeks, and the technical indicators are suggesting that it isn’t over yet.

The MACD is barely positive; it is below its signal line and falling fast. The slow stochastic has almost dropped to the edge of its oversold zone. The RSI is below the 50% level. The index has corrected less than 4% from its Feb ‘11 top, so the bulls shouldn’t be too worried. The S&P 500 is trading well above its rising 200 day EMA, which means the long-term bull market is intact. The 1280 level should provide support and a buying opportunity.

The economy continues to muddle along. Retail sales in Feb ‘11 rose by 1% – its 8th straight monthly increase. The University of Michigan Consumer Sentiment index dropped sharply to 68.2 in Mar ‘11 from 77.5 in Feb ‘11. Average gasoline prices just above $3.50 per gallon has been well absorbed. But in some parts of the US, gas prices are touching the $4 mark, which is a ‘tipping point’ for consumer sentiments.

FTSE 100 Index Chart

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The technical indicators of the FTSE 100 index chart were looking bearish last week. I had suggested waiting for a break of the trading range between 5800 and 6100 before deciding on the next course of action. The bad news of Moody’s downgrade of Spain’s sovereign credit rating, the high oil prices plus news and views of devastation from Japan seemed to push the FTSE 100 over the edge.

The index closed below the 50 day EMA three days in a row, and briefly dropped below the 5800 level on intra-day basis on Fri. Mar ‘11. The technical indicators are looking quite bearish. The MACD has moved deeper into the negative zone, and is well below its signal line. The slow stochastic has entered its oversold region. The RSI is just above its oversold zone.

The 50 day EMA has turned down; the index may drop to the rising 200 day EMA. The FTSE 100 has corrected 5% from its Feb ‘11 top of 6106. An upward bounce from the long-term moving average can provide a buying opportunity.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices are facing deeper corrections. Upward bounces from support levels may provide opportunities to enter – but only with strict stop-losses. Better to err on the side of caution.

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