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Monday, June 6, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jun 03, ‘11

S&P 500 Index Chart


The erratic behaviour of the S&P 500 index chart may be best described as ‘the last hurrah’ of the bulls. The 200 day EMA is still rising and the index is trading above it – which means a bull market - but things are not looking pretty. At the time of writing this post, the S&P 500 is trading below the Apr ‘11 low of 1295. A deeper correction is likely.

The index managed to close exactly on the 1300 level, for its fifth straight lower weekly close. Bulls seemed to be in a festive mood after the Memorial Day long weekend, as the index jumped above the down trend line (connecting the intra-day tops of May 2, 10 and 19), supported by strong volumes on Tue. May 31, ‘11. Bears attacked immediately, and pushed the index below the 50 day EMA on Jun 1 ‘11. The downward drift continued for the next couple of days, breaching the lower edge of the Bollinger Band.

The technical indicators are quite bearish. The MACD is falling below its signal line, and both are in the negative zone. The slow stochastic found resistance at its 50% level, and dropped sharply into negative territory. The RSI is below the 50% level.

The economic growth remains lukewarm. Same-store sales in retail outlets were below expectations in May ‘11. Initial unemployment claims dropped to 422,000 – remaining above the 400,000 mark for the eighth week in a row. Only 54000 new jobs were created in May ‘11 - less than 50% of the expected 125000. The Institute for Supply Management reported that its services index was at 54.6% in May, a bit higher than 53.8% in April.

FTSE 100 Index Chart


In last week’s analysis of the FTSE 100 chart pattern, I had mentioned that a convincing move above the 5950 level may provide an impetus for the bulls. The index breached the 6000 level intra-day on May 31 ‘11 and closed at 5990 – supported by good volumes.

The bears quickly extinguished bullish hopes. The index dropped below the 50 day EMA on Jun 1 ‘11, and by the end of the holiday-shortened week, tested support from the 200 day EMA once more. The down trend from the May 3 ‘11 top remains intact.

The technical indicators are looking bearish. The MACD has slipped below the signal line in negative territory. The slow stochastic had a brief foray above the 50% level, only to drop down. The RSI is also below the 50% level.

The IMF has supported UK’s austerity measures and suggested tax cuts for low-income households, but noted that weak economic growth and the pick-up in inflation over the last few months had been "unexpected". 

Bottomline? The chart patterns of S&P 500 and FTSE 100 indices have spent a month in down trends. Things can get worse before they get better. This is a good time to remain on the sidelines and wait for the down trends to play out.

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