Monday, December 19, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Dec 16, ‘11

S&P 500 Index Chart


The small rounding-top bearish pattern observed on the S&P 500 index chart pattern last week led to a small correction-cum-consolidation. The outcome was along expected lines because of the contradictory technical signals. The technical indicators were looking bullish but were also showing negative divergences.

The technical picture has turned weaker. The index closed below all three EMAs on Fri Dec 16 ‘11 – a bearish weekly close due to the high volumes. The 20 day EMA failed to cross above the 200 day EMA and has turned down. A breach of the Nov ‘11 low of 1159 would form a bearish pattern of lower tops and lower bottoms. As long as the Nov ‘11 low holds, the bears won’t regain control.

The technical indicators are showing bearish signs. The slow stochastic has dropped from its overbought zone, but is above the 50% level. The MACD is barely positive and touching its signal line. The RSI is looking bullish as it rises above its 50% level. But the ROC has dipped into negative territory. The contrary signals means some more consolidation in the offing.

The US economy is starting to get back into the growth path, but too slowly. Initial unemployment claims decreased by 19000 to 366,000 – comfortably below the 400,000 mark. New loans and leases to small businesses have been increasing for the past 15 months – considered as a leading indicator of economic growth. But industrial production in Nov.’11 was down 0.2% on a month to month basis, following a 0.7% increase in Oct. ‘11.

FTSE 100 Index Chart


The small bearish rounding-top pattern on the FTSE 100 index chart had pushed the index below the 200 day EMA last week. Negative divergences in otherwise bullish technical indicators encouraged the bears to sell. The index closed the week below all three EMAs.

The technical indicators have turned weaker. The slow stochastic is falling towards its 50% level. The MACD is barely positive and clinging to its signal line. The RSI is above its 50% level, but its up move has stalled. The ROC is looking bearish by falling sharply into negative territory. Watch the Nov ‘11 low of 5075 closely. If the FTSE falls below it, the bears will regain control. Till then, expect some more consolidation.

The global economic outlook for 2012 seems bleak. Europe may already be in recession. The UK may be slipping into a double-dip recession. Order books of UK factories are shrinking due to poor domestic demand and the slow down in exports to Europe. Top retailers are facing losses.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are struggling to keep the bears at bay. So far, the Nov ‘11 lows have held. A fall below could lead to sharp declines. This isn’t a good time to be adventurous. Hold on to your cash and await a clear trend.

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