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Monday, August 22, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Aug 19, ‘11

S&P 500 Index Chart

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The S&P 500 index chart was expected to regain some lost ground last week. It managed to close above the 1200 level on Mon. Aug 15 ‘11 and went above the 1200 level intra-day on Tue. and Wed., but that was all that the bulls could manage against sustained selling.

The falling 20 day EMA was supposed to provide the first level of resistance to any up move, and the 50 day EMA was expected to cross below the 200 day EMA – the dreaded ‘death cross’ that confirms a bear market. Like a good Hollywood film director, the bears ensured that events followed exactly according to the script. Friday’s fall was accompanied by the highest volumes of the week – an ominous sign. The only silver lining (for the bulls) is that the 1100 level has not been breached as yet. But that may be a temporary respite.

The technical indicators are turning bearish again. Both the slow stochastic and the RSI emerged from their oversold zones, but are turning back well before reaching their 50% levels. The MACD is below its signal line, and sinking deeper into the negative zone. At the time of writing this post, the index is trying to stage a rally. It will be another selling opportunity for the bears.

Economic news remained dismal. Initial jobless claims rose by 9000 to 408,000. Existing home sales dipped by 3.5%. Philly Fed’s regional growth index dropped sharply from +3.2 in July to –30.7 in August (negative number means contraction). Morgan Stanley cut its global GDP forecast to 3.9% from 4.2% for 2011, and to 3.8% from 4.5% for 2012.

FTSE 100 Index Chart

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The FTSE 100 index closed above the 5350 level on Mon. and Tue. last week before the bears decided enough was enough. Friday’s (Aug 19 ‘11) high volume selling pushed the index below the 5000 level intra-day, but short-covering helped the index to close above 5000.

The FTSE 100 last closed below the 5000 level more than a year ago – so the bulls are trying to defend the level with all their might. The technical indicators have started to weaken, with the RSI and the slow stochastic heading down towards their oversold zones once again, and the MACD is falling in negative territory. Any up moves will attract more selling.

Unemployment is rising again. No wonder retail sales are falling. The stock market is finally realising that there will be a prolonged period of little or no growth and low inflation. Stocks are being dumped for safer havens like gold and treasuries.

Bottomline? The S&P 500 and FTSE 100 chart patterns are in confirmed bear markets. Selling on every rise and buying back on the dips should be the strategy - till the charts show clear signs of reversal. No such signs are visible now.

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