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Monday, May 7, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – May 04, ‘12

S&P 500 Index Chart

S&P 500_May0412

In last week’s analysis of the 6 months bar chart pattern of the S&P 500 index, bulls seemed to have the upper hand. But falling volumes as the index rose higher on Friday, Apr 30 ‘12 and slowing momentum in the ROC had hinted at a likely correction.

The index rose to an intra-day high of 1415 on May 1 ‘12, but fell short of the Apr 2 ‘12 top of 1422. A correction started and volumes increased as the index dropped below the 50 day EMA – a sign of distribution. The S&P 500 formed a small rounding-top – a bearish pattern that is also visible on the slow stochastic. The ROC formed a bearish double-top pattern near the overbought level of 50.

The technical indicators are reflecting the bearish mood. The slow stochastic and the RSI have both dropped to their 50% levels. The MACD is barely positive and touching its signal line. The ROC has entered negative territory. A fall below the 1358 level – the intra-day low touched three times in Apr ‘12 – will form a bearish pattern of lower tops and lower bottoms. That may lead to a deeper correction.

Note that the index is trading well above its rising 200 day EMA, so the bull market is under no immediate threat. However, it may be prudent to take some profits off the table. Alternatively, hold with a stop-loss at 1340.

FTSE 100 Index Chart

FTSE_May0412

An ominous bearish pattern has developed on the 6 months bar chart of the FTSE 100 index – a ‘rising wedge’, from which an expected downward break out occurred last Friday, May 4 ‘12. The high volumes on a breakdown day is a further concern. The bulls were standing on thin ice, and the ice has cracked.

In last week’s analysis, selling on rallies was recommended. The index provided a good opportunity to sell by climbing past the 5800 level. The 20 day EMA is below the 50 day EMA and both are sliding down. If the FTSE drops below the Apr ‘12 low of 5576, it can drop to 5400.

The technical indicators are turning bearish. The MACD is touching its signal line in negative territory. The ROC has fallen inside the negative zone. Both the slow stochastic and the RSI have dropped to their 50% levels. The double-dip recession in the UK economy has emboldened the bears.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices show that the bears are on a rampage. The bulls are on the back foot in USA and on the run in UK. This is not the time to be brave. Preserve cash to fight another day.

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