Monday, October 29, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Oct 26, ‘12

S&P 500 Index Chart

S&P 500_Oct2612

Last week’s analysis of the 6 months daily bar chart pattern of S&P 500 index had the following observations:

  • The index had possibly formed a triple-top reversal pattern
  • Technical indicators were bearish
  • A breach of the 50 day EMA could lead to a deeper correction

Note that the breaches of the 20 day and 50 day EMAs (on Fri. Oct 19 and Tue. Oct 23) were accompanied by strong volumes. That means any upward bounce from current levels is likely to face resistance from the short-term and medium-term EMAs. There is a good chance of the index dropping to its 200 day EMA, before the bulls can gather strength to resume the up move.

Technical indicators are bearish, but looking a bit oversold. MACD has dropped into negative territory, below its falling signal line. RSI is below its 50% level but moving sideways. Slow stochastic is inside its oversold zone. The 200 day EMA is still rising. The index is undergoing a bull market correction.

Economic news continues to be a mix of good and bad. Durable goods orders showed improvement. Initial jobless claims dropped to 369,000 from 392,000 a week ago. But corporate results continued to disappoint.

FTSE 100 Index Chart


There is good news and bad news visible on the 6 months daily bar chart pattern of the FTSE 100 index. First, the good. The index has not yet fallen below its Oct 1 ‘12 low of 5738. That means the double-top formed at around 5930 has not yet been technically confirmed.

Now, the bad. Friday’s (Oct 26 ‘12) intra-day low of 5753 breached the Oct 11 ‘12 low of 5767. The technical indicators have turned bearish. MACD is still positive, but falling below its signal line. RSI is drifting sideways below its 50% level. Slow stochastic has bounced up weakly from the edge of its oversold zone. If 5738 gets breached, a drop below the 200 day EMA is likely to follow.

The UK economy came out of recession, growing 1% in the three months to September, the fastest rate for five years. But the majority of the growth was due to one-off factors. However, factory orders fell in October, fuelling fears that a much hoped for recovery in the run-up to Christmas has already run out of steam.

Bottomline? Chart patterns of S&P 500 and FTSE 100 indices are undergoing bull market corrections. Such corrections improve the technical health of stock indices and enable investors to add/accumulate at lower levels. Economic recovery is slow, but the worst seems to be over.

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