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Monday, November 7, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Nov 04, ‘11

S&P 500 Index Chart

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Two weeks back, there were a few doubts whether the bears have been vanquished or not. Those doubts have now been removed. The S&P 500 index is trading comfortably above the 200 day EMA. The 20 day EMA has crossed above the 50 day EMA, and is about to cross above the 200 day EMA as well. Once the 50 day EMA climbs above the 200 day EMA, a return to the bull market will be confirmed.

The technical indicators are correcting overbought conditions, but remain bullish. The slow stochastic has dropped from its overbought zone, but remains above the 50% level. The MACD is positive and touching its signal line. The RSI dropped after touching the edge of its overbought zone, but has bounced up from the 50% level. The ROC has bounced up from the ‘0’ line, back into positive territory.

Note the positive divergences in all four technical indicators that preceded the sharp rally during Oct ‘11. The index dropped to a lower bottom, but all four technical indicators made higher bottoms.

The US GDP grew at an annualised rate of 2.5% in Q3 – nothing great, but growth nevertheless. The manufacturing PMI slipped to 50.8 in Oct ‘11 from 51.6 in Sep ‘11 – a sign of slowing expansion. Weekly unemployment claims were 397,000 – still high, but below the psychological 400,000 mark. Compared to the chaos in Europe, the US economy seems to be slowly grinding its way out of trouble.

FTSE 100 Index Chart

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The FTSE 100 index chart tried to follow in the footsteps of the S&P 500 chart out of a bear market. But a brief foray above the 200 day EMA is all that it could manage so far. The index dropped below all three EMAs, and is currently facing resistance from the falling 200 day EMA.

The technical indicators are showing some weakness. The slow stochastic has slipped below the 50% level after dropping from the overbought zone. The MACD is touching its signal line, and has started sliding in positive territory. The RSI bounced up from its 50% level after touching its overbought zone. The ROC bounced back after dipping into negative territory, but is heading down again.

The chaos caused by last week’s Greek drama seems to be abating. They look all set to accept austerity measures to avail the debt bailout. The next big problem is likely to be Italy, where bond yields are reaching unrealistic proportions. UK’s Q3 GDP grew a miniscule 0.5%, while manufacturing PMI slipped to 47.4 in Oct ‘11 from 50.8 in Sep ‘11 – a sign of contraction. Looks like a long, hard winter ahead.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices continued their surprisingly strong rallies, with brief forays above the 200 day EMAs. The S&P 500 is showing signs of returning to a bull market, thanks to an economy that is growing ever so slowly. The FTSE 100 may revert to a bear market as there are ominous signs that the UK economy may slip into a recession again. Remain stock specific. Unless Eurozone debt problems are resolved satisfactorily, there is no point in feeling too bullish.

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