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Monday, November 21, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Nov 18, ‘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 a symmetrical triangle consolidation pattern. Since consolidation patterns tend to be continuation patterns and the index had entered the triangle from below, the expected break out was upwards. But triangles are often unreliable, so I had warned investors to trade with caution because a break out could occur in either direction.

On Thur. Nov 17 ‘11, the index broke downwards on the highest volumes of the week, and dropped below all three EMAs. The 20 day EMA - which had crossed above the 200 day EMA and raised hopes of a return to a bull market - has dropped back on to the long-term moving average. The 50 day EMA failed to get close to the 200 day EMA, let alone cross above it. Though the index managed to close above the 1200 level on a weekly basis, it is likely to fall to about 1160 before one can expect some recovery.

The technical indicators are looking quite bearish. The slow stochastic is about to enter its oversold zone. The MACD is barely positive, and is falling below its signal line. The RSI has dropped below the 50% level. The ROC failed to enter positive territory, and is sliding down. The bears are regaining control once again.

The US economy is finally sprouting some green shoots. October housing starts showed marginal improvement, and industrial production rose by 0.7% (an improvement over the 0.1% drop in September). Weekly unemployment claims fell to 388,000. These numbers are not worth celebrating by any means, but a sign that the tide may finally be turning. But the Eurozone debt problems remain a bearish overhang on the stock market.

FTSE 100 Index Chart

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Last week, I had made the following comment about the FTSE 100 chart pattern:

“The index is consolidating within a triangle pattern, but it looks like a bearish descending triangle from which the likely break will be downwards.”

Unlike a symmetrical triangle that is unreliable in indicating the direction of the eventual break out, descending (and ascending) triangles typically break out through the horizontal side of the triangle.

The FTSE 100 made another futile effort to cross above the 200 day EMA, dropped below all three EMAs by the end of the week and just about managed to remain within the descending triangle. But the bears have prevailed as expected. At the time of writing this post, the index has dropped more than 125 points, and is likely to test its Oct ‘11 low in the near future.

The technical indicators are looking bearish. The slow stochastic and the RSI are about to fall into their oversold zones. The MACD is below its signal line, and on the verge of turning negative. The ROC is inside negative territory. More correction is on the cards.

The Bank of England has warned that the UK economy is grinding to a halt and has cut the GDP growth forecast for 2012 to 1% (from the previous forecast of 2%). Unseasonably warm weather has reduced offtake of winter garments in retail outlets. Change of guard in Greece, Italy and Spain has not removed the Eurozone debt problems. The  economic woes continue.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices have technically slipped back into bear markets. Things may get worse before they get any better. Stay in cash, and wait for the selling to abate.

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