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Monday, November 28, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Nov 25, ‘11

S&P 500 Index Chart

SnP500_Nov2511 _ Triangle-001-001

The S&P 500 index chart had another lower close in the Thanksgiving holiday week. I had made the following comment last week: “ (the index) is likely to fall to about 1160 before one can expect some recovery.” As if on cue, the index closed the week at 1159. Some times technical analysis works like magic – but no sleight of hand here. The downward target was arrived at by drawing a line parallel to the upper boundary of the symmetrical triangle pattern (in yellow).

The sharp correction has brought the 20 day EMA down to the 50 day EMA. A cross below will be the final confirmation of a return to a bear market. The technical indicators are looking bearish to the point of being oversold. The slow stochastic is deep inside its oversold zone. The MACD is falling below its signal line into negative territory. The RSI is just above its oversold zone. The ROC is sliding deeper into the negative zone. A likely upward bounce may be used by the bears as a selling opportunity.

The US economy is taking baby steps towards recovery. Q3 corporate profits rose 11.4% on a YoY basis. Initial unemployment claims rose by 5000 to 393,000 but remained below the psychological 400,000 mark. Rail traffic rose about 2% YoY. Durable goods orders declined a bit. Same store retail sales grew 2.8% YoY. A double-dip recession seems unlikely, provided problems in China and the Eurozone don’t aggravate.

FTSE 100 Index Chart

FTSE_Nov2511 _ Triangle-001-001 

The FTSE 100 index chart broke below the descending triangle pattern (in yellow), as was expected last week, and touched an intra-day low of 5075 on Nov 25 ‘11. But it turned out to be a ‘reversal day’ (lower low, higher close), as the bulls were helped by short covering.

Sharp falls from a clearly visible bearish pattern are often followed by equally sharp pullbacks. At the time of writing, the index had gained 3%. But the dual resistance from the falling 20 day EMA and the lower boundary of the descending triangle may prove too strong. The break below the triangle was a selling opportunity. The pullback is another opportunity to sell.

The technical indicators are bearish, but showing signs of turning back from oversold conditions. The slow stochastic is in its oversold zone, but turning up. The MACD is still falling below its signal line in negative territory. The RSI stopped short of dropping into its oversold zone. The ROC is negative, but bounced up sharply.

The Paris-based OECD expects the UK economy to enter a double-dip recession with GDP  growth projected at only 0.5% in 2012. The Bank of England may need to increase its QE amount to promote growth. Cash-strapped companies are finding it difficult to hire, invest and get bank loans. The German bond issue flopped. Italy’s yields are rising to unsustainable levels. Eurozone worries remain.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices have fallen deeper into bear markets, and may be heading towards their Oct ‘11 lows. At times like these, no action may be the best action. Preserve your cash.

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