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Monday, May 21, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – May 18, ‘12

S&P 500 Index Chart

SnP500_May2112

The S&P 500 index breached the support level of 1340 and dropped sharply below the 200 day EMA. Such a possibility had been hinted at by the bearish technical indicators. It may be worth repeating the observations made in last week’s analysis: “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.” At the time of writing this post, the index is seeking support from the 1300 level.

Bulls should be concerned about the rising volumes as the index fell. The good news is that the technical indicators are looking oversold, which may lead to an upward bounce. The MACD is falling below its signal line in negative territory. Both the RSI and the slow stochastic are well inside their oversold zones. Note what happened when the RSI last entered its oversold zone back in Aug ‘11. The index has dropped too far below its falling 20 day EMA, which is usually a precursor to a bounce up.

How strongly can the bulls fight back? The disappointing listing of the much-hyped Facebook IPO suggests bearishness. Expect resistance to any up moves from the 200 day EMA (at 1314) and the falling 20 day EMA (at 1348). Bears will try to retain their upper hand by selling on the rise. Technically, a bear market won’t be confirmed unless the 50 day EMA crosses below the 200 day EMA.

FTSE 100 Index Chart

FTSE_May1812

The previous week’s ‘dead cat bounce’ on the FTSE 100 index chart was followed by renewed selling by the bears last week. The drop below the 5300 level on Friday, May 18 ‘12 was supported by a sharp volume spike not seen in nearly 2 months (not shown in chart above), which may indicate a temporary selling exhaustion.

The index has dropped too far below its falling 20 day EMA and all three technical indicators are looking oversold. The MACD is below its signal line and falling deeper into negative territory. Both the RSI and the slow stochastic are in their oversold zones. There is a good possibility of an upward bounce due to short-covering and investment buying. But the bounce is likely to be short-lived. It is only a matter of time before the ‘death cross’ of the 50 day EMA below the 200 day EMA technically confirms a return to a bear market.

The (UK) economy has deep structural weaknesses and has been through a colossal banking crisis that has caused the deepest recession since the 1930s. With the Greek debt crisis casting a pall of gloom over the Eurozone, things are unlikely to get better any time soon. The FTSE 100 chart is reflecting that.

Bottomline? The bears are beginning to take complete control over the chart patterns of the S&P 500 and FTSE 100 indices. Hold on to your cash and wait for the tide to turn.

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