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Monday, August 8, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Aug 05, ‘11

S&P 500 Index Chart

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The S&P 500 index chart pattern cascaded down like a waterfall – first below the rising 200 day EMA, and then below the lower boundary of the trading range between 1250 and 1370. Stop-losses got triggered and margin calls led to panic selling. At the time of writing this post, the S&P 500 is trading at levels not seen since Oct ‘10.

Probable causes of the crash were flying around – Eurozone debt crisis, a last minute face-saving formula for raising the debt limit, downgrade of US credit rating from AAA to AA+, withdrawal of QE2. But the bull market had lost its fizz and was trading sideways within a 120 points range for 6 months. It finally fell due to its own weight.

The technical indicators are looking oversold, with the slow stochastic and RSI in their oversold zones, and the MACD deep in negative territory. Such sharp falls are usually followed by an upward bounce. If you are still invested, use the likely bounce to exit.

The US economy is still making painfully slow progress. 154000 non-farm payroll jobs were added in the private sector in July ‘11, but 37000 government jobs were lost. The weekly leading index (WLI) growth indicator of ECRI rose marginally to 2.1 from 2.0. The PMI index dropped from 55.3 to 50.9. Below 50 would mean a contracting manufacturing sector. The GDP growth in the first half of 2011 was just 0.4%.

FTSE 100 Index Chart

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In last week’s analysis, the technical indicators had hinted that the FTSE 100 index chart will not be able to cling on to the support from its 200 day EMA for long. The sharp sell-off on increasing volumes pushed the index well below its 6 months long trading range between 5600 and 6100.

The ‘death cross’ of the 50 day EMA below the 200 day EMA will confirm a bear market. The technical indicators are very bearish, pointing to a deeper correction. The slow stochastic and RSI are in their oversold zones. The MACD is well inside negative territory. Use any upward bounce to sell – if you haven’t done so when the 5600 level was breached.

A lower-than-expected GDP growth rate of 1.3% in 2011, weakening employment, and muted consumer spending may push UK’s sluggish economy into a double-dip recession - as per this article.

Bottomline? The chart patterns of S&P 500 and FTSE 100 indices are in danger of falling into bear markets. Panic selling is usually followed by a bounce up and then a gradual grinding down to lower levels. This is not a good time to bottom fish. Stay in cash.

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