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Monday, October 22, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Oct 19, ‘12

S&P 500 Index Chart

S&P 500_Oct1912

In last week’s analysis of the 6 months daily bar chart pattern of the S&P 500 index, a small double-top reversal pattern was observed. Technical indicators were looking bearish and profit booking was recommended on an upward bounce.

The index bounced up smartly on rising volumes till the middle of the week, but only managed to touch a lower third top (at 1464) – possibly forming a triple-top reversal pattern. The sharp fall on the last two days of the week was also on rising volumes, which is a sign of distribution.

All may not be lost yet for the bulls. The index found support from its 50 day EMA. The entire move from the Sep ‘12 top of 1474 looks like a ‘flag’ pattern, which has bullish implications. Bears will point out that the uptrend line connecting the Jun ‘12 and Jul ‘12 bottoms (not shown in chart) was breached on a closing basis last Friday (Oct 19).

Technical indicators are looking bearish. MACD is still positive, but has been falling below its signal line for the past 4 weeks. RSI and slow stochastic are both below their 50% levels. If the 50 day EMA gets breached, be prepared for a deeper correction.

US economic data continues to support a slow recovery. Retail sales, manufacturing and new housing exceeded expectations. But existing home sales were weaker and some of the corporate results – specially from tech big-wigs – were disappointing.

FTSE 100 Index Chart


The 6 months daily bar chart pattern of the FTSE 100 index shows a spirited recovery by the bulls. The index bounced up from the 50 day EMA and tested its Sep ‘12 top of 5933, but fell short by about 5 points. Volumes were lower during the formation of the second top (not shown in chart), which leaves the door open for the formation of a double-top reversal pattern.

However, a double-top will be confirmed only if the index falls below its Oct 1 ‘12 low of 5738. Note that all three EMAs are rising and the index is trading above them. The bull market is still alive and kicking – despite the gloomy economic scenario.

Technical indicators are bullish, but showing some signs of weakness. MACD has crossed above its signal line in positive territory, but the upward momentum is weak. RSI is above its 50% level but turning down. Slow stochastic is well inside its overbought zone, but is also turning down.

Analysts expect a 0.6% rise in GDP, lifting the economy out of the longest double-dip recession since the second world war. But the outlook is for a period of steady, unspectacular growth rather than the surge in output witnessed in the aftermath of previous recessions.

Bottomline? Chart patterns of S&P 500 and FTSE 100 indices are showing topping patterns. Remember that technical analysis is not a science, and patterns don’t always play out as expected. Both indices are in bull markets, so stay invested but maintain appropriate stop-losses.

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