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Monday, September 5, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Sep 02, ‘11

S&P 500 Index Chart

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The technical indicators of the S&P 500 index chart were showing positive divergences last week, which signalled that the relief rally may continue. But the rally was losing momentum, and I expected the index to face resistance from the falling 50 day or 200 day EMAs.

True to expectations, the index climbed past the 20 day EMA during the early part of the week, only to face strong resistance from the 50 day EMA. The poor jobs data – zero new jobs were added in Aug ‘11 – caused Friday’s sell off, but the index was already heading down.

The slow stochastic turned back after reaching its overbought zone. The MACD is above its signal line, but has started to fall in negative territory. The RSI is sliding down towards the 50% level. Looks like the relief rally from the low of 1100 has ended, and the S&P 500 will travel further south.

The PMI (Purchase Manager’s Index) Aug ‘11 reading was 50.6, down 0.3 from the July ‘11 figure, an indication that manufacturing growth is on the verge of stalling. The weekly unemployment claims were at 409,000 – lower by 12,000 from the previous week’s adjusted figure, but above the critical 400,000 mark. Unemployment level remained unchanged at 9.1%. The US economy needs jobs to grow, but hiring has been anaemic.

In an interesting twist to the employment story, a couple of small business CEOs who were hiring were interviewed on CNBC. One of them mentioned that a couple of potential candidates cancelled job interviews because their unemployment benefits got extended. The other CEO made the shocking comment that selected candidates were specifying their own joining dates! They were willing to join only after their unemployment benefits came to an end. To paraphrase Marcellus (Hamlet, Act 1, Scene 4): “Something is rotten in the United States of America.”

FTSE 100 Index Chart

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The FTSE 100 index spent a couple of days above the 20 day EMA in a holiday-shortened week, but could not cross the hurdle of the 50 day EMA. The technical indicators are showing signs of weakness, with both the slow stochastic and the RSI turning down after rising above their respective 50% levels. The MACD is rising above its signal line, but remains negative.

UK’s PMI reading was 49.0 in Aug ‘11, down from 49.4 in Jul ‘11. Below 50 means contraction in manufacturing growth. The story was the same in the Eurozone, with the exception of Germany and Austria. In a report circulated to institutional investors, a Goldman Sachs analyst warned that European sovereign debt crisis is likely to get worse, and a large number of financial institutions are at the brink of an abyss. Not great news for the stock market.

At the time of writing this post, the FTSE 100 is trading 3.5% (almost 200 points) lower. The 5000 level is in danger of being breached.

Bottomline? S&P 500 and FTSE 100 chart patterns clearly show that relief rallies have come to an end. Both indices are likely to fall deeper into bear markets. Gold’s price is back up to the $1900 level. The flight to safety has resumed. Stay away.

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