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Monday, July 23, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jul 20, ‘12

S&P 500 Index Chart

SP500_Jul2012-001-001

The 6 months daily bar chart pattern of S&P 500 index spent another week of trading within a bearish ‘rising wedge’ pattern. Volumes rose as the index climbed up – raising bullish hopes. After touching an intra-day, weekly and monthly high of 1380 on Thu. Jul 19 ‘12, the wheels appeared to come off the index wagon.

May be it was the sudden rise in the unemployment claims that caused the high volume drop on Fri. Jul 20 ‘12. Or, it could have been some prudent profit booking. The reasons are immaterial. What is material is that the index is falling short of the upper edge of the wedge on every rise, and is in danger of breaking down below the wedge.

Why? Because of negative divergences in RSI and slow stochastic. Both are in bullish zones, but touched lower tops as the S&P 500 index reached a higher top. All three EMAs are moving up and the index is trading above them. Technically, the index is in a bull market. So, there is no need to sell in a panic.

Hold with a stop-loss at 1340. A drop below the 200 day EMA can be very bearish.

FTSE 100 Index Chart

FTSE_Jul2012-001-001

Looks like the 6 months daily bar chart pattern of the FTSE 100 index had its few days in the sun – much like a typical English summer. Dark clouds are gathering on the horizon and the sky is about to fall. The index spent another trading week above its 200 day EMA, but touched a lower top and dropped to the lower edge of the bearish ‘rising wedge’ pattern.

Technical indicators are bullish, but showing clear signs of weakness. MACD is entwined with its signal line in positive territory, but starting to slip down. RSI is falling towards its 50% level. Slow stochastic found resistance from the edge of its overbought zone, and is moving down. (At the time of writing this post, the FTSE index has lost more than 2% and trading below the wedge and all three EMAs.)

The rally from the Jun ‘12 low was a bear market rally, which gave an opportunity to sell.

Bottomline? There is no reason to revise last week’s conclusions: “Chart patterns of the S&P 500 and FTSE 100 indices are trading within bearish ‘rising wedge’ patterns from which the likely break out will be downwards. Patterns don’t always repeat on technical charts, but it is prudent not to bet against a clearly visible bearish pattern. Caution should be the watchword.” 

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