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Monday, May 2, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Apr 29, ‘11

S&P 500 Index Chart

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The technical indicators were looking bullish the previous week, but a stronger stand by the bears was expected around the 1340 level in the S&P 500 index. After just a day’s pause, the index embarked on a sharp rally that went easily past the Feb ‘11 top of 1344 to touch a new high of 1365. The index gained nearly 2% on a weekly closing basis.

The technical indicators are bullish to the point of being overbought. That doesn’t mean the index can’t rise higher. It is pushing against the upper edge of the Bollinger Band. The MACD is above the signal line, and both are rising in positive territory. The slow stochastic is well inside its overbought zone. The RSI is climbing towards its overbought zone, but is showing negative divergence. It failed to reach a new high with the index.

The economy is growing, but the growth is very slow. Q1 GDP growth estimate came in at a meagre 1.8%. Initial unemployment claims rose by 25000 to remain above the 400,000 mark. Capital goods orders rose by 3.7%, up from a 0.5% increase the previous month after a 5.9% slide in Jan ‘11. The housing market is a major disappointment, with low sales and rising inventories. But uncle Ben seems happy because the stock market is going great guns.

FTSE 100 Index Chart

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In a trading week shortened by the Easter holidays, the FTSE 100 chart rose past its previous tops of Mar ‘11 and Apr ‘11 but stopped just short of the 6100 level and couldn’t quite test the Feb ‘11 top of 6106. The index gained a bit less than 1% on a weekly basis.

Will it be able to breach the Feb ‘11 top soon? The technical indicators are looking bullish. The MACD is positive and above its signal line. The slow stochastic is in the overbought zone. The RSI is at its 50% level. But all three technical indictors are displaying negative divergences – reaching lower tops while the FTSE rose higher. Some consolidation or correction can be expected before the index can rise higher.

The UK economy is stagnating, if not slowing down – thanks to higher public spending. Q1 GDP growth estimates came in at a flat 0.5%. Unemployment situation is improving, but is still close to 8%, and may rise if the GDP growth doesn’t pick up soon.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices show that the bulls are back in control, despite the negligible growth rates of the respective economies. The news of Osama Bin Laden’s demise may have a short-term positive effect. Stay invested, but maintain trailing stop-losses.

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