Are you worried about the recent volatility in the Stock Market? Are you confused what to buy, sell or hold? The newsletter selects quality mid-caps and small-caps for investors with a long-term perspective and provides timely buy/sell/hold suggestions. Send an email (to address in profile below) for subscription details today.

Monday, September 26, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Sep 23, ‘11

S&P 500 Index Chart

The technical indicators of the S&P 500 index chart were showing bullish signs last week, as the index consolidated within a bearish 'flag' pattern. But I had cautioned investors that the S&P 500 was in a bear market, and all rallies may be used as selling opportunities by the bears.

The index managed to close above the 1200 level on Monday and Tuesday (Sept 19-20 '11), but the rot started on Wednesday, and got worse on Thursday. The index broke below the bearish flag pattern on high volumes that confirmed the technical validity of the break.

Such a break from a consolidation pattern is usually followed by a pullback, which partly happened on Friday, Sep 23 '11, and is continuing at the time of writing this post. For those who missed out on selling earlier during the break below the flag, the pullback is a good selling opportunity. Bearish technical indicators are pointing to more correction in the S&P 500 index.

The jobless non-growth in the US economy is meandering along. Hopes of bulls - who expected that the Fed's 'Operation Twist' will change the market mood - have been belied. Unemployment claims fell a little but remains above the 400,000 mark. Housing market isn't getting any better. Banks are sitting on cash, but not lending. Companies are sitting on cash, but not hiring. Consumers are woefully short of cash, and aren't spending. No wonder risky assets are being sold.

FTSE 100 Index Chart

The FTSE 100 index chart plummeted by almost 6% on a weekly closing basis, breaking below the bearish flag pattern. Flags on technical charts usually fly half-mast. In other words, the flag forms about halfway down from the top, and the index is likely to fall a similar amount points-wise after the break below the flag. Another 15-20% fall from the current level won't be surprising.

The technical indicators have turned bearish. Both the slow stochastic and the RSI are below their 50% levels and moving down. The MACD is negative, and below its signal line. All three EMAs are falling, and the FTSE 100 is trading below them - the hallmark of a bear market.

As per an article in The Economist, the outlook for the euro-area economy is deteriorating fast, which augurs ill for attempts to wrest the finances of indebted countries under control. At best there will be a wrenching slowdown; at worst, a relapse into recession. Sounds quite ominous.

Bottomline? S&P 500 and FTSE 100 index charts have broken below bearish flag patterns on strong volumes, and are in the process of pulling back to the flag. Bears will use it as selling opportunities. 15-20% correction from current levels are likely. Not a good time for bottom-fishing, but start preparing your buy lists.

No comments: