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Monday, September 3, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Aug 31, ‘12

S&P 500 Index Chart

S&P 500_Aug3112

The one year bar chart pattern of the S&P 500 index has been consolidating within a small ‘flag’ pattern after testing its Apr ‘12 top. The 20 day EMA has provided good support to the index so far. The consolidation may not be over yet, which means the index may fall below the 20 day EMA.

A ‘flag’ is usually a continuation pattern. Since it is forming after a substantial up move, there is every possibility that the index will break out upwards from the ‘flag’ and resume its up move. The index is trading above all three EMAs. The 50 day and 200 day EMAs are moving up. These are signs of a bull market.

However, the index is trading near a 3 year high. Plus there is a possibility – however remote – of a double-top reversal pattern forming. It may be better to err on the side of caution. Stay invested. Buy only on a convincing move above 1425.

Technical indicators are turning bearish. MACD is positive, but falling below its signal line. RSI has bounced up a bit after dropping to its 50% level. Slow stochastic has moved sharply below its 50% level and still falling.

The US economy is growing – but very slowly. Q2 GDP was adjusted marginally higher, and probably forced the Fed’s hand in postponing QE3. Initial jobless claims remain below the critical 400,000 mark, but there are some signs of it inching upwards. A recession may be off the table, but the rally in the index seems a bit overdone.

FTSE 100 Index Chart

FTSE_Aug3112

Unlike the S&P 500 index, the one year bar chart pattern of the FTSE 100 index is showing much more weakness, though the uptrend for the Jun ‘12 low is still intact. The index touched a lower top, and dropped below 5800 and its 20 day EMA to seek support from its 50 day EMA. If the support doesn’t hold, the uptrend may get reversed.

Technical indicators are looking bearish. MACD is positive, but falling rapidly below its signal line. RSI has slipped below its 50% level. Slow stochastic has entered its oversold zone. Any upward bounce should be accompanied by good volumes, otherwise bears may use the bounce to sell.

UK’s economy remains in a recession, despite some improvement in the manufacturing PMI in Aug ‘12. With the Eurozone situation showing very little signs of improvement, UK’s exports are unlikely to pull the country out of its doldrums.

Bottomline? Chart patterns of S&P 500 and FTSE 100 indices are undergoing corrections after rallying for 3 months. Such corrections improve the technical health of the charts and help to strengthen the next up moves. But one should remain cautious in case the corrections turn out to be trend reversals. The best way to protect your investments is to book partial profits, or hold with suitable stop-losses.

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