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Monday, November 5, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Nov 2, ‘12

S&P 500 Index Chart

S&P 500_Nov0212

In last week’s analysis of the S&P 500 index chart pattern, the following observations were made: “Note that the breaches of the 20 day and 50 day EMAs 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.”

In a trading week shortened by a devastating hurricane, the index bounced up sharply but faced strong resistance from the 50 day EMA, and headed downwards. The strong volumes on Fri. Nov 2 ‘12 indicate that bears are in control for the time being. However, the index is well above its rising 200 day EMA, so the correction following a triple-top reversal is a bull market correction, and not a trend reversal.

Technical indicators are looking bearish. MACD is below its signal line in negative territory. RSI moved up to its 50% level but turned down. Slow stochastic has emerged from its oversold zone. The downward target of the triple-top reversal pattern is around 1400.

The US economy appears to be on the mend. Things may look a lot worse after the massive damages caused by hurricane ‘Sandy’ are fully assessed. Initial claims of unemployment dropped to 363,000. ISM’s PMI index showed manufacturing expansion for the second month in a row.

FTSE 100 Index Chart

FTSE_Nov0212

What had looked like a double-top reversal pattern on the FTSE 100 chart pattern did not get confirmed technically, because the ‘valley’ level of 5738 between the two tops at 5930 did not get breached. Patterns don’t always play out as expected. That is why it is important to wait for technical confirmations before taking buy/sell decisions.

The index has moved smartly above its 20 day and 50 day EMAs. All three EMAs are rising and the index is trading above them. The bulls appear to have overcome a strong bear challenge. Technical indicators are turning bullish. MACD has made a small rounding-bottom pattern to touch its signal line in positive territory. RSI has crossed above its 50% level. Slow stochastic is about to do likewise.

The UK economy still lacks growth momentum, as per this article. The manufacturing sector contracted for the sixth straight month in October. So why is the FTSE still rising? Probably because the worst appears to be over.

Bottomline? Chart patterns of S&P 500 and FTSE 100 indices are showing divergent views. While the S&P 500 is still in a corrective mode, the FTSE 100 index seems to have recovered from a correction. Both indices are in bull markets – evident from the rising 200 day EMAs. Hold on to existing positions, or add to them. Maintain suitable stop-losses.

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