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Monday, May 14, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – May 11, ‘12

S&P 500 Index Chart

SnP500-001-001

Last week, the following comments were made about the chart pattern of the S&P 500 index: “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.”

Investors were recommended to book some profits, or hold with a stop-loss at 1340. It was the state of the technical indicators that led to the short-term bearish view. Note that the S&P 500 chart is playing out as per expectations. The index dropped below the 1358 level on intra-day basis – forming a bearish pattern of lower tops and lower bottoms. The bulls put up a decent fight but could not prevent a weekly close below the 1358 level. At the time of writing this post, the index was testing support from the suggested stop-loss level of 1340.

The technical indicators are looking bearish. The RSI is falling below its 50% level, and seems ready to drop into its oversold zone. The MACD is below its signal line, and both are falling inside negative territory. The slow stochastic has slipped into its oversold zone. A fall below 1340 can lead to a test of support from the 200 day EMA.

Are the bulls in tactical retreat or have they been vanquished? Note that the 20 day EMA is touching the 50 day EMA and both have started falling. While that may mean that the near term outlook is bearish, both EMAs are still well above the 200 day EMA. Even if the index falls below the 200 day EMA – like it did back in Dec ‘11 - there is a good possibility that the bulls may fight back. 1250 – 1300 is a long-term support zone.

FTSE 100 Index Chart

FTSE100-001-001

The 6 months bar chart pattern of the FTSE 100 index shows that the bulls have taken a solid battering from the bears. The fall from the bearish ‘rising wedge’ pattern was sharp and backed by strong volumes (not shown in chart). The 5500 level was easily breached, followed by a ‘dead cat bounce’. Bears have used the brief bounce to renew their attack. At the time of writing this post, the FTSE 100 is trading close to the 5450 level.

The technical indicators are bearish. Note that all three indicators touched slightly higher bottoms as the index touched last week’s low of 5464 (on May 9 ‘12). The positive divergences caused only a brief bounce – which indicates the strength of bear selling.

The RSI is below its 50% level, but trying to turn up. The MACD is falling below its signal line in negative territory. The slow stochastic has emerged from its oversold zone, but may drop back. The 20 day EMA has dropped to the 200 day EMA. The 50 day EMA is falling towards the 200 day EMA. Things aren’t looking good for the bulls.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices show that the bears are tightening the screws. The bulls are at a distinct disadvantage in the US market, and totally on the run in the UK market. This isn’t a good time to play contrarian. Preserve cash.

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