Monday, March 19, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Mar 16, ‘12

S&P 500 Index Chart


Two weeks back, negative divergences in the technical indicators and lack of volume support were observed on the chart pattern of the S&P 500 index. The index had touched a 52 week high, but a correction appeared imminent. There was a short and sharp correction that dropped the index below its 20 day EMA and the 1350 level. But the index recovered quickly and surged to a new high above the 1400 level on a volume spurt.

The technical indicators are bullish. The slow stochastic has re-entered its overbought zone after a quick dip to the 50% level. The MACD is positive and above its signal line. The RSI bounced up after dropping to its 50% level. The ROC is rising in positive territory. But the negative divergences remain. All four technical indicators failed to reach new highs.

The US economy continues to improve ever so slowly. Weekly initial jobless claims came down to 351,000 from the previous week’s 365,000. Non-farm payrolls increased by 227,000 in Feb ‘12 – lower than growth in Jan ‘12. Retail sales rose – so did gasoline prices. AAII’s sentiment survey showed bullish sentiment rose to 45.6% (above its historical average of 39%) while bearish sentiment was 27.2% (below its historical average of 31%). Rising bullish sentiment can be a contrarian indictor.

FTSE 100 Index Chart


An overdue correction pushed the FTSE 100 index down to its rising 50 day EMA. A quick recovery followed, but a volume spurt last Friday (Mar 16 ‘12) failed to push the index above the 6000 level. All three EMAs are rising and the index is trading above them – so the bull market is alive and well.

The technical indicators are bullish, but showing negative divergences. All four touched much lower tops while the index moved higher. The slow stochastic dropped below its 50% level, but has climbed sharply to the edge of its overbought zone. The MACD is positive and touching its signal line. The RSI is just above its 50% level. The ROC is back in positive territory after dropping into the negative zone.

Fitch and Moody’s warned of possible downgrades of UK’s credit rating due to weak economic recovery and elevated debt levels. A 0.4% drop in industrial production in Jan ‘12 renewed concerns of a double-dip recession. It wasn’t all bad news. Advent of spring saw one of the best weeks of sales in department stores businesses.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices continued their strong rallies after brief corrections. As long as liquidity taps remain open, there will be no threats to the bull markets. However, prudence calls for taking some profits off the table. Alternatively, stay invested with trailing stop-losses and ride the bull rallies.

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