Stock Index Chart Patterns – S&P 500 and FTSE 100 – Oct 14, ‘11

S&P 500 Index Chart

The S&P 500 index chart continued with the rally of the previous week, as it surged past the 50 day EMA to touch an intra-day high of 1225 – just a whisker short of the Aug 31 ‘11 top of 1231. However, the weekly close was the highest since Aug 3 ‘11.

The possibility of a breach of the 50 day EMA due to the positive divergences in the technical indicators, was mentioned in last week’s post. Will the rally continue in the current week as well? The technical indicators seem to suggest that. The MACD and the ROC are rising in positive territories. The RSI is above the 50% level. The slow stochastic has entered its overbought zone.

Be careful about jumping in to buy. The highest close in more than two months was accompanied by the lowest volumes of the week. That is a bearish sign. The proximity of the index to the falling 200 day EMA is another worry for the bulls. Technically, the S&P 500 is in a bear market, so the rally should be a selling opportunity.

The news on the economic front is contradictory. Exports continued to grow, but the trade deficit grew as well. New unemployment claims fell by 1,000 from the week before, but stayed above the 400,000 mark. Retail sales rose by 1.1% – the highest increase in 7 months. But the Reuters/Univ. of Michigan Consumer Sentiment index fell to 57.5 from 59.4; and ECRI’s WLI (Weekly Leading Index) growth indicator was down to – 9.6 from – 8.7 a week back. ECRI has predicted a recession.

FTSE 100 Index Chart

The FTSE 100 index had outperformed the S&P 500 in the previous week by climbing above its 50 day EMA. It continued its outperformance last week by reaching its highest intra-day top since Aug 4 ‘11.

The drop in volumes on the last day of the week as the index rose higher is a sign that the rally is losing momentum. The slow stochastic is in its overbought zone, and the MACD is rising in positive territory – both are bullish signs. But the RSI has turned down a bit after crossing above its 50% level, and the ROC touched a lower top as the index rose higher. The FTSE 100 chart is forming a broadening pattern (higher tops and lower bottoms) which is a sign of uncertainty, and therefore, bearish.

The index is trading below its falling 200 day EMA, which indicates a bear market. Use the rally to lighten up instead of committing more funds. The Centre for Economics and Business Research has forecast UK’s GDP growth at a paltry 0.6% this year and 0.7% in 2012. Even those figures may not be achieved if there is a Lehman Brothers-like big bank failure in the Eurozone.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices have completed two weeks of sharp bear market rallies, on the back of hopes that the Eurozone debt problems will some how get sorted out. Those hopes are likely to be belied. There may be more pain before any real gain.