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Monday, July 9, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jul 06, ‘12

S&P 500 Index Chart


In a holiday shortened week, the 6 months daily bar chart pattern of the S&P 500 index displayed a split personality. On the first two days of the week, the index rose to close at a 2 months high of 1374. But all gains were wiped out on the last two days of the week.

Readers should not be surprised at the turn of events. In last week’s post, negative divergences in RSI and slow stochastic had warned that the rally may get stalled. Bulls may start getting worried by the bearish ‘rising wedge’ pattern visible on the chart.

Note that the index failed to reach the upper end of the ‘rising wedge’ before turning down. Supports from the entwined 20 day and 50 day EMAs and the lower edge of the wedge may prolong the rally a bit longer. But a break down below the wedge followed by a drop below the Jun ‘12 low of 1267 is the probable outcome.

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 heading down towards its 50% level. Slow stochastic has fallen sharply from its overbought zone.

Technically, S&P 500 is still in a bull market as it is trading above all three EMAs. But caution is advised because of the possibility of a downward break below the ‘rising wedge’.

FTSE 100 Index Chart


A bear market rally in the 6 months daily chart pattern of the FTSE 100 index surged past the 200 day EMA. Hope readers paid heed to last week’s advice of selling into the rally.

The entire rally from the Jun ‘12 low has formed a bearish ‘rising wedge’ pattern, from which the likely break out is downwards. Note that the FTSE failed to touch the upper edge of the wedge last week before turning down, which is a bearish sign.

Technical analysis is not a science. Outcomes of previous price patterns don’t always get repeated. However, when a bearish pattern is clearly visible, it is prudent to err on the side of caution.

Technical indictors are looking bullish, but there are weakening signs. MACD is rising above its signal line in positive territory, but its upward momentum is slowing down. RSI is above its 50% level, but has turned down. Slow stochastic is inside its overbought zone, but has also turned down.

The rally may continue a bit longer, but a break down below the ‘rising wedge’ and a drop below the Jun ‘12 low of 5230 are distinct possibilities.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices have formed bearish ‘rising wedge’ patterns from which the likely break outs will be downwards. The lows touched in Jun ‘12 may not hold. Bulls should seek greener pastures. Bears look ready to attack.

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