S&P 500 and FTSE 100 charts (Dec 30 '16): form bearish patterns after touching new highs

S&P 500 index chart pattern

The following comments from last week's post on the daily bar chart pattern of S&P 500 may be noted: "... the index should breakout upwards from the triangle. However, triangles tend to be unreliable patterns. A breakout can also occur downwards ..."

The index broke out upwards from the small symmetrical triangle on Dec 27, but with low volume support. Upward breakouts should be accompanied by a significant increase in volumes to be technically valid.

An 'end-run' like sharp downward move followed. After receiving brief support from the 20 day EMA on Dec 29, the index dropped to close below the 2240 level. During 2016, the index gained about 195 points (9.5%).

Daily technical indicators are looking bearish after correcting overbought conditions. MACD is falling below its signal line in positive zone - after forming a 'rounding top' reversal pattern. RSI is seeking support from its 50% level. 

Slow stochastic has dropped inside its oversold zone. Some more correction towards the rising 50 day EMA is likely.

On longer term weekly chart (not shown), the index closed well above its three weekly EMAs in a long-term bull market for the 43rd week in a row. All three weekly technical indicators are in the process of correcting overbought conditions.

FTSE 100 index chart pattern

After forming a 'double bottom' reversal pattern during Nov '16, the daily bar chart pattern of FTSE 100 rallied during Dec '16 as if there will be no tomorrow. 

In a holiday-curtailed trading week marked by low volumes (not shown), the index rose to touch and close at a new lifetime high - gaining 900 points (>14%) during 2016.

The index is trading above its three rising EMAs in a bull market, but has formed a narrow 'rising wedge' pattern from which a downward breakout is the most logical outcome.

All three daily technical indicators are inside their respective overbought zones - warning about a correction.

On longer term weekly chart (not shown), the index closed well above its three weekly EMAs in a long-term bull market for the 27th week in a row. Weekly technical indicators are looking overbought and showing negative divergences by failing to touch new highs with the index. 

BSE Sensex and NSE Nifty 50 index chart patterns – Jun 13, 2014

An external event has dampened bullish market sentiments. The turmoil in Iraq has caused oil prices to rise, which will affect India’s current account deficit and inflation – putting paid to any hopes of an interest cut by RBI in the near term.

So far, the oil price rise is merely speculative as Iraq’s major oil fields are in the southern part of the country where the Sunni rebels are yet to gain control. It is unlikely that the western countries will sit back and let these oil fields fall into the hands of rebels.

However, it has provided bears with an opportunity to get back in the game. In last week’s analysis, overbought conditions and negative divergences visible on daily and weekly technical indicators had provided advance warning of corrections in both Sensex and Nifty indices.

BSE Sensex index chart

Some bearish signals are visible on the daily bar chart pattern of Sensex:

1. The upward break out from the symmetrical triangle was expected to be followed by a pullback towards the top of the triangle. Instead, it is looking like an ‘end run’ (‘false’ break out) that may drop the index below the triangle
2. The vertical distance between the 50 day EMA and 200 day EMA has reached 2000 points. It has been observed that a major correction often follows such a condition.
3. All four technical indicators have started correcting overbought conditions. Though still in bullish zones, their downward momentum is increasing.

There is a possibility of the index dropping down to fill the ‘gap’ formed on the chart on May 13 ‘14. Contrary to popular belief, a part or complete filling of the ‘gap’ has bullish implications. The index is expected to resume its up move subsequently.

Note that the long-term bull market is intact. That means any correction may be used as an adding opportunity. Should you short the index? You may, if you are a short-term trader. But long-term investors should stay long. However, profits can be booked in small-cap and mid-cap stocks that have risen sharply.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty has formed a ‘reversal week’ pattern (higher high, lower close) after touching a new lifetime high. That has bearish implications. Note that a similar pattern was formed two weeks back, but with a difference. The index didn’t touch a new high then.

Weekly technical indicators are in their respective overbought zones, but beginning to correct. MACD is still moving up, but its upward momentum is slowing down. ROC has started to slide down to its rising 10 week MA. RSI and Slow stochastic have started moving down.

Nifty is still trading 10% above its 20 week EMA, and needs to correct some more to restore the technical ‘health’ of the chart.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices have started correcting after touching new lifetime highs. Bull market corrections provide adding opportunities. But don’t jump in feet first. Be cautious, and very selective.

BSE Sensex Index Chart Pattern - Sep 25, '09

Last week's analysis of the BSE Sensex index chart pattern included several concerns about the continuation of the bull rally - lower volumes on up days, negative divergences in the technical indicators, the widening distance between the 50 day and 200 day EMAs, and the possibility of an 'end run' after the upward breakout from the 'rising wedge' pattern.

The cumulative effect of all the bearish signals led to a halt in the bull rally, but the bears could not wrest the initiative. The 6 months bar chart pattern of the BSE Sensex index shows that the truncated F&O settlement week passed off without any significant change:-

After Monday's holiday, the index made a new high of 16943 and a higher close of 16886 on Tue, Sep 22 '09 - once again on lower volume. The next day was a lower top and lower close day on much higher volume. Thu, Sep 24 '09 was a higher close day, but again on lower volume. The week ended with another down day as the index closed marginally lower for the week.

The positive signal is that the index managed to stay above the upper trend line of the 'rising wedge' pattern. But the negative signals from the previous week - mentioned in the opening paragraph - have not been overcome.

Next week will be another holiday-shortened one, and it is unlikely that there will be significant trading activity. That will tend to tip the scales towards the bears. Keep an eye on the 15600 level for support. That is where the 50 day EMA has reached. It is also the level of the top made in Aug '08.

The business news in the western world have been dominated by the '1-year-since-the-Lehman-Brothers-collapse' stories. So I thought of including some charts, comparing how the BSE Sensex index has performed with respect to a few world indices. Here they are:-

The top two charts show that the Dow (USA) is down 10% and the FTSE (UK) is absolutely flat, while the Sensex is up 20% over the past 1 year. The bottom chart shows a marginal out-performance by the Shanghai (China) index. Note the 40% out-performance by the Shanghai Composite index through most of Jul '09 till a big ongoing correction started from Aug '09 - bringing the two indices closer in performance.

Now, a longer period chart throws up a tantalising possibility:-

The 2 years chart comparison shows the BSE Sensex completely flat, while the Shanghai Composite has dropped by 50% since Sep '07! What happened here? Well, the Shanghai Composite entered the bear market in Oct '07, when the Sensex was in the final stages of a bull market.

Fast forward to the current time. The Shanghai Composite completed its bear market rally and has been in a corrective mode since Aug '09. Will the pattern repeat? Will the Sensex follow behind and correct as much as the Shanghai Composite? The possibility does exist.

Bottomline? The BSE Sensex index chart pattern is technically in a new bull market, but the possibility of a big correction makes me circumspect. Avoid new investments and book some profits if you haven't done so already.