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Monday, January 23, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jan 20, ‘12

S&P 500 Index Chart

SnP500_Jan2012

There was no stopping the bulls as the S&P 500 index chart comfortably scaled the 1300 level, and maintained its bullish pattern of higher tops and higher bottoms. All three EMAs are rising, and the index is trading above them. The bulls are back in the drivers seat.

The technical indicators are reflecting the bullish condition. The slow stochastic is deep within its overbought zone, where it can stay for a long time. The MACD is above its signal line and rising. The RSI is in its overbought zone. The ROC is positive but sliding.

The index has risen too sharply this month, and there are negative divergences visible in the MACD (lower top) and ROC (series of lower tops). A correction may be round the corner - which should be welcomed by the bulls. It would restore the health of the nascent bull market and provide an entry point.

The US economy continues to flash mixed signals, as it slowly gets out of a downturn. Industrial production increased by 0.4% in Dec ‘11. Last week’s initial unemployment claims came in much lower at 352,000. NAHB’s Housing Market Index rose to 25 – still low but the highest since mid-2007. Core inflation is decreasing but service sector inflation is increasing – so a deflation is unlikely. Rail traffic dropped sharply in Jan ‘12. The Baltic Dry Index has dropped by more than 50% in the last three months – close to the lows of 2009. That means, global trade is slowing down.

FTSE 100 Index Chart

FTSE_Jan2012

The FTSE 100 index chart defied gravity and continued its bull rally last week. The index just about managed to get past its Oct ‘11 top, and formed a bullish pattern of higher tops and higher bottoms. The imminent ‘golden cross’ of the 50 day EMA above the 200 day EMA will technically confirm a return to a bull market.

The technical indicators are bullish, but showing signs of weakness. The slow stochastic is inside its overbought zone. The MACD is positive and above its signal line, but has stopped rising. The RSI is above its 50% level but sliding down. The ROC is barely positive, and touched a lower top as the index rose higher.

The UK economy is lagging behind the stock market. But there was some good news. Inflation fell to 4.2% in Dec ‘11 from 4.8% in Nov ‘11. This may pave the way for expansion of Bank of England’s Quantitative Easing programme. Luxury car manufacturers like Bentley, Jaguar and Land Rover (no longer British-owned brands) can help the country’s GDP growth, thanks to the healthy demand from China.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are back in bull markets, even as the US and UK economies continue to stumble on their way to recovery. This looks like a rally driven more by liquidity than by fundamental strength. Be prepared for sharp corrections, but use them to add. Looks like the world may not come to an end after all.

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