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Monday, April 9, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Apr 6, ‘12

S&P 500 Index Chart


The 6 months bar chart pattern of the S&P 500 index touched new intra-day and closing highs on Mon. Apr 2 ‘12, but corrected down to its 20 day EMA on a holiday-shortened week. Volume support was lacking as the index rose higher and all four technical indicators showed negative divergences by touching lower tops. May be it was the combined effect of the negative divergences; the tendency of traders to lighten up before a long weekend; and the realisation that there wasn’t going to be another round of Quantitative Easing that caused the correction.

The technical indicators are looking bearish. The slow stochastic has dropped sharply from its overbought zone and looks ready to drop below its 50% level. The MACD has fallen below its signal line in positive territory. The RSI has slipped below its 50% level. The ROC has entered the negative zone. The correction may not be over yet. A test of support from the 50 day EMA is a possibility. Only a drop below the Mar ‘12 low of 1340 can change the bullish outlook.

Private sector job growth was lower than expectation, but weekly jobless claims are falling. Companies have a lot of cash on their books to tide over the weak economic fundamentals, so there should be no immediate threat to the bull market. Q1 results will be hitting the market any time now. Stock specific buying with appropriate stop-losses may be a good idea.

FTSE 100 Index Chart


The 6 months bar chart pattern of the FTSE 100 index made a valiant effort to return to its bull market by rising above its 50 day and 20 day EMAs. But it touched a lower intra-day top and fell all the way down to its 200 day EMA. In last week’s analysis, the possibility of bears using any upward bounce to sell, and the 5700 level acting as a possible support were mentioned.

The support level did hold on a closing basis. The 200 day EMA is just below it. Both together should provide good support. Another upward bounce is likely, but it will be a selling opportunity. Though the index is still above its 200 day EMA, it is clearly in a down trend.

Bearish patterns of lower tops and lower bottoms are clearly visible in all four technical indicators. The slow stochastic is just above its oversold zone. The MACD is negative and below its signal line. The RSI has fallen below its 50% level. The ROC is inside the negative zone. A drop below the 200 day EMA will raise the spectre of a bear market.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are undergoing corrections. The US index is in the midst of a bull market correction. The dip can be used to buy. The UK index is in a down trend, and a ‘sell on rise’ strategy seems appropriate. Whichever strategy is adopted, be stock specific instead of worrying too much about index gyrations. And please do not forget to maintain stop-losses.

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