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Monday, June 25, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jun 22, ‘12

S&P 500 Index Chart


The S&P 500 index chart rode a near 100 point rally from well below its 200 day EMA to the support-resistance level of 1360 in 12 trading sessions. Such sharp rallies typically occur in bear markets – though technical confirmation of a bear market is still awaited. Note that three intra-day bottoms near the 1360 level were touched in Apr ‘12. Previous bottoms often act as resistance levels. This was the reason why readers were warned last week not to enter unless the index crossed the 1360 level.

The rally was partly on expectation of a QE3 announcement from US Fed. An extension of ‘Operation Twist’ was not considered good enough by market players. The continued weakness in Eurozone, Moody’s downgrade of several banks, weaker manufacturing data and weak jobs report in the US contributed to a crash on Thurs. Jun 21.

The index touched a lower top, and a bearish pattern of lower tops and lower bottoms remains intact. A drop below the low of 1267 touched on Jun 4 ‘12 may finally push the index back into a bear market. Technical indicators are turning bearish.

MACD has slipped into negative territory, though it is still above its signal line. RSI has dropped below its 50% level. Slow stochastic is hurtling down towards its 50% level. At the time of writing this post, the S&P 500 index is seeking support from its 200 day EMA. Bears are tightening their grip.

FTSE 100 Index Chart


Bullish technical indicators on the FTSE 100 chart had pointed to a cross above the 50 day EMA and a test of the 200 day EMA in last week’s analysis. Readers were advised to stay away, or use the rally to book profits. Some times chart patterns turn out exactly as you expect.

Technical indicators are still bullish, but showing signs of weakening. MACD is positive and above its signal line, but the histogram is falling. RSI is about to drop to its 50% level. Slow stochastic is in its overbought zone, but turning down.

Note that the FTSE 100 faced resistance from its 200 day EMA and touched a lower top than its May ‘12 top, but all three indicators touched higher tops. The combined positive divergences may prevent the index from falling below its Jun 1 low of 5230.

Bottomline? The S&P 500 index is on the verge of dropping into a bear market. The FTSE 100 index is already in a bear market. This is a time for discretion, not valour. Conserve cash and let the corrections play out.

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