Monday, December 26, 2011

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Dec 23, ‘11

S&P 500 Index Chart


In last week’s analysis, contradictory signals from the technical indicators of the S&P 500 index chart had signalled a week of consolidation before Christmas. Instead, the index took investors for a roller-coaster ride – closing at its lowest level for the month on Mon. Dec 19 ‘11 and then rallying above all three EMAs to its highest closing of the month on Fri. Dec 23 ‘11. A bullish pattern of higher tops and higher bottoms will get formed if the index manages to move above its Oct ‘11 top of 1293. Will it be able to do so?

The technical indicators are looking bullish, but there are signs of fatigue. The slow stochastic, which was falling towards its 50% level last week, turned around smartly and is about to enter its overbought zone. The MACD has climbed up above its signal line in positive territory. The RSI, which was rising above its 50% level last week, dropped below its mid-point before inching back above it. The ROC had dropped into the negative zone last week, but turned around to just about enter its positive zone.

Note that all four technical indicators are showing negative divergences. The S&P 500 closed at its highest level for the month and was just 2 points short of its intra-day high for the month, but the technical indicators reached much lower tops. Another concern for the bulls is the progressively lower volumes as the index rose higher – with Friday’s volume being the lowest of the month. It is difficult to sustain a rally with low volume support.

US economic news and indicators are still providing mixed signals. Q3 GDP growth estimate was revised down to 1.8%. There is hope that Q4 GDP growth will show improvement. Weekly rail traffic grew by 11.7% over the same week in 2010. Reuters/Univ. of Michigan survey showed an increase in consumer sentiment to 69.9 against 64.4 in Nov ‘11, but was 18% lower than its average level since 1978. Initial unemployment claims fell to 364,000. New orders for manufactured durable goods increased by 3.8%. New home sales increased by 1.6%, but the median price dropped. Not great figures, but not doom and gloom either.

FTSE 100 Index Chart


The FTSE 100 index chart tried to follow the lead from the S&P 500, but was less successful in its efforts to reverse the bearish trend. The index dropped to its lowest level for the month on Tue. Dec 20 ‘11. The subsequent rally climbed above the 20 day and 50 day EMAs but stopped short of the 200 day EMA. A weekly close above the 5500 level was accompanied by very low volumes.

The technical indicators are looking weak. The slow stochastic dropped below its 50% level, and failed to get back into the bullish zone. The MACD slipped into negative territory before managing to scramble back into the positive zone. The RSI fell below its 50% level and remained there. The ROC tried valiantly to clamber back into positive territory but failed. Looks like the Santa Claus rally may be skating on thin ice.

The UK economic outlook continues to be bleak. Q3 GDP growth was revised upwards to 0.6%; but services sector output contracted by 0.7% in Oct ‘11. Q4 GDP may be poor, and a threat of recession is looming large. The current account deficit in Q3 ballooned to 15 Billion sterling - its widest since 1955.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices embarked on Santa Claus rallies, but on low volumes. The possibility of the rallies continuing during the last week of the year can’t be ruled out. Bears may use the opportunity to sell. Buying can be considered only on clear breaks above Oct ‘11 tops.

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