Monday, September 10, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Sep 07, ‘12

S&P 500 Index Chart

S&P 500_Sep0712

In last week’s analysis, it was observed that the daily bar chart pattern of the S&P 500 index was consolidating within a ‘flag’ pattern. The following remarks were made: “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 behaved as per expectation by breaking out upwards from the ‘flag’, and crossed the resistance level of 1425 to touch a 3 year high of 1438. The supporting volume spurt validated the break out. The remote possibility of a ‘double top’ reversal pattern is off the table. All three EMAs are rising and the index is trading above them. Bulls are back on top.

So, is it a good time to buy? Bullish technical indicators are suggesting as much. MACD is positive and has crossed above its signal line. RSI has risen to the edge of its overbought zone. Slow stochastic has climbed sharply to enter its overbought zone. But MACD is showing negative divergence by touching a lower top.

Break outs are often followed by pullbacks. In this case, a pullback towards 1425 may provide a better entry opportunity. The jobs report was disappointing. The rise in gold’s price means that the market is expecting that the Fed may have little option but to announce some form of a QE3. If it doesn’t come through, the index may correct.

FTSE 100 Index Chart


The correction in the daily bar chart pattern of the FTSE 100 dropped the index all the way down to the 200 day EMA. Just when the bears were expecting to dominate, the tables were turned by the ECB President’s announcement of an unlimited bond buying programme to bail out the debt-ridden Euro nations. 

Global stock markets bounced up in euphoria as the possibilities of a collapse of the euro and a break up of the Eurozone receded to the background. The bond buying programme is hardly a solution to the sovereign debt problems. So, the whole drama may get re-enacted some time in the not-so-distant future. Till then, bulls may try to make merry.

Technical indicators are turning bullish again. MACD bounced up from the ‘0’ line, but is below its falling signal line. RSI has managed to cross above its 50% level. Slow stochastic has emerged from its oversold zone and rising sharply towards the 50% level. The index needs to cross above the 5900 level for bulls to regain complete control.

Bottomline? Chart patterns of S&P 500 and FTSE 100 indices are looking bullish after emerging from brief periods of consolidation/correction. Stay invested, or add with suitable stop-losses. Despite sluggish economies in the USA and UK, the stock indices are rising on a surge of liquidity. Enjoy the party while it lasts. De-risk your portfolios with partial profit booking from time to time.

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