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Monday, August 29, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Aug 26, ‘11

S&P 500 Index Chart

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In last week’s analysis of the S&P 500 index chart pattern, I had observed that the index was trying to stage a rally, which would probably give the bears another selling opportunity. The S&P 500 actually closed almost 5% higher on a weekly basis. The relief rally – that is all that it can be called now – was initially based on the hope that Bernanke would surely announce some sort of QE3 at Jackson Hole on Fri. Aug 26 ‘11; and when no announcement was forthcoming, the bulls treated it as ‘no news is good news’!

The bears weren’t entirely inactive. Note that the index could not climb past the falling 20 day EMA. Can the rally continue? Positive divergences in the technical indicators, which reached slightly higher tops while the index made a lower top, may suggest so. But the rally seems to be losing momentum. Note that the slow stochastic is still below its 50% level; the RSI turned down after touching its 50% level, and the MACD just moved above its signal line but is still negative. Thursday’s (Aug 25 ‘11) down day saw the highest volumes, which is not a bullish sign. Even if the index rises above the 20 day EMA, the falling 50 day EMA and the 200 day EMA are likely to be a tougher hurdles. Bulls will hope that the recent bottom at 1100 holds – otherwise, the S&P 500 can fall much lower.

New home sales were down a bit. Initial jobless claims rose to 417,000. Q2 GDP growth was 1% (it was 0.4% in Q1) and inflation was 3.3% (vs. 4% in Q1). The Weekly Leading Index (WLI) from ECRI dropped to –2.1% from –0.1% (negative numbers mean a worsening economy). Doesn’t seem like much of a recovery, does it?

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Last week, I had mentioned that the bulls will try to defend the 5000 level on the FTSE 100 index chart pattern with all their might – and so they did, launching a mini rally. As expected, the rally attracted selling. The index turned down after reaching the 20 day EMA, but managed to eke out a 1.7% weekly gain.

The technical indicators are showing some signs of bullishness. The MACD has just crossed above its signal line, but remains negative. Both the RSI and the slow stochastic are rising towards their 50% levels. But the volumes paint a bearish picture – the down days on Thursday and Friday had the highest trading volumes of the week.

The soaring cost of food, utilities and transport left UK households with less discretionary income to spend, as per this article. Inflation rose to 4.4% in July from 4.2% in June. The housing market continues to stumble, with weakening demand and falling prices. The worst doesn’t appear to be over yet, and the probability of a double-dip recession is increasing.

Bottomline? The S&P 500 and FTSE 100 chart patterns are trying to form bottoms near their recent lows, and start counter-trend rallies. But they may only be temporary bottoms, before the next wave of selling pushes the indices lower. Time to stay on the sidelines and await clearer trend indications.

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