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Monday, July 11, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jul 08, ‘11

S&P 500 Index Chart

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In last week’s analysis of the S&P 500 index chart pattern, the widening Bollinger Bands had hinted at the possibility of volatile trading. The technical indicators were beginning to look overbought – a harbinger of a correction.

In a trading week shortened by the July 4 holiday, the S&P 500 displayed volatility and the start of a correction. After two days of sideways move, a spurt on Thursday, July 7 ‘11, probably caused by an improvement in employment data, took the index to a close above the 1350 level after almost 2 months.

In between, the index made a rounding-bottom bullish pattern that received good support from the rising 200 day EMA. (The rounding-bottom is also visible in the 20 day EMA and the MACD.)

The down-trend line (not drawn on chart) connecting the May 2 ‘11 and Jun 1 ‘11 tops, was breached on Jul 1 ‘11. But there was no significant increase in volume – in fact volumes began sliding before the breach. That makes the breach technically suspect.

The technical indicators are looking overbought. The slow stochastic is in its overbought zone, and seems ready to turn down. The MACD is positive, but has risen too fast above the signal line. The RSI is at the edge of its overbought zone. A pullback to the 50 day EMA (and the top of the down-trend line) at 1310 is a possibility.

FTSE 100 Index Chart

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The FTSE 100 index chart treaded water around the 6000 level for three days before a sharp up move on Thu. July 7 ‘11, followed by a ‘reversal day’ pattern (higher high, lower close) on Fri. July 8 ‘11. The index closed flat on a weekly basis – just below the psychological 6000 level.

The index is above all three EMAs, which means a bull market technically. The technical indicators are reacting from overbought conditions. A fall to the 50 day EMA, or even the 200 day EMA, will not be surprising.

The slow stochastic is about to drop from its overbought zone. The MACD is positive, and above its signal line but turning down. The RSI is at the edge of its overbought zone – not a place it visits often.

Bottomline? The chart patterns of S&P 500 and FTSE 100 indices are showing signs of correcting a sharp rally. The bull markets are still intact, but the economies are weakening. Both indices are moving in broad sideways channels for 6 months, giving trading opportunities.

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