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Monday, June 4, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jun 01, ‘12

S&P 500 Index Chart

S&P_Jun1-001-001

The following comments were made in last week’s analysis of the S&P 500 index chart pattern: “The S&P 500 appears to be consolidating within a symmetrical triangle pattern, which can eventually turn out to be a rectangular ‘flag’ pattern or a ‘rising wedge’ pattern. Either way, such consolidation patterns tend to be continuation patterns – so the likely break out from the pattern should be downwards.”

Prophetic? Hardly. Just the experience of observing similar patterns play out on hundreds of charts over the years. A disappointing employment report last Friday (Jun 1 ‘12) may have triggered the downward break, but the weak technicals had already warned of such a possibility.The eventual break down from a ‘flag’ pattern was accompanied by high volumes – which doesn’t augur well for the bulls.

Technical indicators are looking oversold once again. MACD is falling below its signal line in negative territory. Both RSI and slow stochastic are back inside their oversold zones, but have touched higher bottoms as the S&P 500 touched a lower bottom. Positive divergences, and the fact that the index is in the middle of the support zone of 1250-1300 mentioned last week could lead to some consolidation or an upward bounce towards the ‘flag’.

If the index falls below 1250, it can go down to test, and perhaps breach, the Dec ‘11 low of 1202. Technically, a bear market will get confirmed only when the ‘death cross’ (of the 50 day EMA below the 200 day EMA) occurs. It may be prudent to book profits/cut losses.

FTSE 100 Index Chart

FTSE_Jun1-001-001

What had looked like a ‘symmetrical triangle’ consolidation pattern on the FTSE 100 chart last week, turned out to be a bearish ‘flag’ pattern. Since the ‘death cross’ had already confirmed a bear market, the break down below the ‘flag’ pattern was no surprise.

Technical indicators are bearish, but showing positive divergences. All three indicators touched higher bottoms as the index dropped lower. MACD is entangled with its signal line in negative territory. RSI is below its 50% level. Slow stochastic has re-entered its oversold zone. The index is trading well below its 200 day EMA. An upward bounce or some consolidation can be expected before the down move resumes.

Bottomline? The S&P 500 chart shows that the bulls are losing their battle against the bears, but haven’t yet lost the war. The long-term bull market is still intact, and will remain so as long as the index stays above the Oct ‘11 low of 1075. The UK economy is falling into a deeper recession and the FTSE 100 is falling deeper into a bear market. Stay away and preserve cash. A global bear market is looming.

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