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Monday, August 19, 2013

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Aug 16, ‘13

S&P 500 Index Chart

S&P 500_Aug1613

In last week’s analysis of the daily bar chart pattern of S&P 500 index, weakness in daily technical indicators led to the following cautionary remark: “Keep a watch on the 1680 level; a breach may lead to further correction.”

After receiving support from its 20 day EMA during the first three days of the week, the index dropped below the 1680 level with a downward ‘gap’ and closed below its 50 day EMA by the end of the week. Breach of a support level with a ‘gap’, backed by strong volumes, is an ominous sign.

It is a sign of ‘distribution’ and may turn the 1680 level into a resistance level for future up moves. Daily technical indicators are looking bearish. MACD is falling sharply below its signal line, and about to enter negative territory. RSI is moving sideways below its 50% level. Slow stochastic has dropped inside its oversold zone.

The index is trading well above its rising 200 day EMA, so there is no immediate threat to the bull market. However, the index appears to have broken down from a bearish ‘rising wedge’ pattern (formed during Jul ‘13). A deeper correction is possible.

Partial profit booking may be in order – if not done so already on breaching of the 1680 level.

FTSE 100 Index Chart

FTSE_Aug1613

The 6 months daily bar chart pattern of the FTSE 100 index was expected to struggle near the 6600 level. It managed to move above 6600 on Tue. Aug 13, but formed a ‘reversal day’ pattern (higher high, lower close) the following day – ending the brief attempt at a rally. The index dropped below both its 20 day and 50 day EMAs on Thu. Aug 15 and closed exactly at the 6500 level by the end of the week.

The index has formed a bearish pattern of lower tops and lower bottoms during the first fortnight of Aug ‘13. A deeper correction appears likely. Daily technical indicators are looking bearish and supporting a further correction.

MACD is falling below its signal line, and is barely positive. RSI is below its 50% level, but showing positive divergence by touching a higher bottom. The positive divergence is not supported by MACD or Slow stochastic, which is falling towards its oversold zone.

The index is trading above its rising 200 day EMA, which is the sign of a bull market. But a test and breach of the long-term moving average is a possibility.

Bottomline? 6 months daily bar chart patterns of S&P 500 and FTSE 100 indices are in long-term bull markets, but undergoing corrections. With QE3 tapering a distinct possibility in the US and slow growth of the US and UK economies, plus a sell-off in emerging markets, this may be a good time to take some profits off the table.

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