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Monday, September 12, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Sep 09, ‘11

S&P 500 Index Chart

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The bears obviously recharged their batteries over the Labor Day weekend, as the S&P 500 index started the truncated week’s trading with a high volume down day. The bulls attempted a brief recovery that pushed the index above the 20 day EMA, but it failed to close above the 1200 level. Friday’s sell-off – whether due to Bernanke’s non-speech or Obama’s not-really-a-stimulus speech – ensured a lower weekly close for the index.

The S&P 500 chart has spent almost 5 weeks within an upward-sloping ‘flag’ consolidation pattern since touching the low of 1101 on Aug 9 ‘11. Flag patterns tend to be continuation patterns. Since the index descended into the pattern, it is likely to descend further out of the pattern. There are measuring implications for a downward break from a ‘flag’ – the index can fall the same distance as the drop from the Jul ‘11 top to the Aug ‘11 low of about 250 points. That gives a target of 900 on the S&P 500 index in the not-too-distant future.

The technical indicators are giving mixed signals. The slow stochastic has dipped below the 50% level, but the RSI has climbed above its 50% level. The MACD is above the signal line, but has started to move down in negative territory. One can expect a bit of consolidation before the index resumes its fall.

The economic news is neither calamitous, nor inspiring confidence. Non-manufacturing ISM number inched up to 53.3 from July’s 52.7, showing marginal growth. Exports in July was 3.6% higher than in June and 15% higher on a YoY basis. But the good news was offset by declining housing prices, and initial unemployment claims of 414,000.

FTSE 100 Index Chart

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Last week’s chart pattern of the FTSE 100 was almost a repeat of the previous week’s trading. Two closes above the 20 day EMA; a failure to test the falling 50 day EMA; and a capitulation by the weekend. The lower top and lower bottom formed during the week is a signal that the bears are taking charge once again.

Like the S&P 500, the FTSE 100 has been consolidating within a bearish upward-sloping ‘flag’ pattern for the past 5 weeks. The drop of about 1300 points from the Jul ‘11 top of 6084 to the Aug ‘11 bottom of 4791 means that the index can drop 1300 points below the ‘flag’. That gives a downward target of 4000.

The technical indicators are mildly bullish. Both the slow stochastic and the RSI are above their 50% levels. The MACD is in negative territory, but above its signal line. Bulls may try their best to defend the 5000 level, but the bears are likely to overwhelm them sooner or later.

A Greek debt default is looming, and the other PIIGS nations aren’t in great financial shape either. The ECB appears to be unsure about what to do. UK’s economy is in danger of slipping into a double-dip recession if growth doesn’t pick-up soon. Were the recent riots across the country a harbinger of a harsh winter of discontent?

Bottomline? S&P 500 and FTSE 100 charts have formed bearish ‘flag’ patterns from which both indices can tumble down about 20% more. Stay on the sidelines, or use a further dip in gold prices to stock up on the yellow metal.

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