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Monday, March 21, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Mar 18, ‘11

S&P 500 Index Chart

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Last week, the technical indicators were suggesting that the correction in the S&P 500 chart wasn’t over. But the index was trading well above the rising 200 day EMA, which meant that the bull market was intact. I had indicated a possible drop to the 1280 level as a buying opportunity.

The index dropped below the 50 day EMA to an intra-day low of 1249 on Wed. Mar 15 ‘11, and closed below the lower edge of the Bollinger Band. Volumes were the highest during the week on Wednesday’s down day – a sign of distribution. The recovery over the next two days almost regained the 1280 level, but not the 50 day EMA. The index lost about 2% on a weekly basis.

The technical indicators remain bearish. The MACD is well below its signal line, and both are in negative territory. The slow stochastic briefly dropped inside the oversold zone; the subsequent bounce has been weak. The RSI is below the 50% level, and moving sideways. The index needs to move above the 50 day EMA on strong volumes to enable the bulls to regain control.

Housing starts dropped more than 22% from Jan ‘11 and permits for new home construction declined by more than 8%. As per a survey by the AAII, bullish sentiment of individual investors has dropped from more than 60% three months back to below 30%. New jobless claims dropped by 16000; so did industrial production by 0.1%. These are not the signs of healthy economic growth.

If the S&P 500 index is unable to clear the 1332 level, the bearish pattern of lower tops and lower bottoms may lead to a deeper correction down to the 200 day EMA. Buy selectively, but with appropriate stop-losses.

FTSE 100 Index Chart

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The previous week’s bearish technical indicators of the FTSE 100 index chart had hinted at a likely drop to the 200 day EMA. The index fell even lower to 5600 and closed below the 200 day EMA three days in a row, raising the spectre of a bear market. The upward bounce on Fri. Mar 18 ‘11 took the index above the 200 day EMA on an intra-day basis and a close exactly on the long-term moving average. The FTSE 100 lost nearly 2% on a weekly basis.

Friday’s trading volume was the highest in three months, which should provide some consolation to the battered bulls. But the technical indicators are not conducive for a swift recovery. The MACD is below the signal line, and both are deep inside negative territory. The slow stochastic is in the oversold zone. The RSI is just above its oversold zone. The Mar ‘11 top of 6052 needs to be crossed to negate the bearish pattern of lower tops and lower bottoms.

In the midst of austerity measures, the UK government has decided to take a lead role in teaching Libya a lesson. The cost of the military adventure will be considerable, if quick success isn’t achieved. A possible interest rate hike in Apr ‘11 may further stymie the feeble economic growth.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices are yet to recover fully from strong bear attacks. Both indices are facing meaningful corrections after 4 months. That will be good for the longer term health of the bull markets. Stay invested with appropriate stop-losses. Any buying should be very selective, and in small quantities.

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