Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jul 01, ‘11

S&P 500 Index Chart

After hovering for two week’s near the 200 day EMA, the S&P 500 decided it didn’t want to drop into a bear market after all. The strong 5.6% weekly gain – the best weekly performance in two years by the index – sent the bears scurrying for cover.

What caused the sudden rally? It may seem that the financial bail-out package for Greece, forcing their government to adopt stringent austerity measures in the face of riots and protests by Greek citizens, caused world-wide relief that led to euphoria in the stock markets. The more likely reason was that the bull’s used the Greece news as an excuse to trap the bears.

The combined effect of buying and short-covering took the index well above its 50 day EMA and beyond the upper Bollinger Band. The bands are widening, which means trading can turn volatile. An entire month’s losses have been recovered in a week.

The technical indicators have turned bullish to the point of being overbought. The MACD has risen away from its signal line into positive territory. The slow stochastic is deep inside its overbought zone. The RSI is rising quickly towards its overbought zone.

There hasn’t been any great change in the US economy to warrant such a sharp rise. The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) dropped for the 10th straight week to 2.0 from the previous week’s 2.9. Initial unemployment claims declined by 1000 to 428000 – the 12th consecutive week above the psychological 400,000 mark.

FTSE 100 Index Chart

The FTSE 100 managed to hold on to the support level of 5650, and embarked on a swift rally – ostensibly due to all-around relief that Greece’s sovereign default was temporarily averted. The index sailed above its 200 day and 50 day EMAs, pierced the upper Bollinger Band, and regained all the ground it had lost during the month of June ‘11.

The technical indicators are looking bullish, which means the rally is likely to continue this week. The MACD has crossed above its signal line, and is about to enter positive territory. The slow stochastic has entered its overbought zone. The RSI has moved above its 50% level.

UK’s manufacturing sector grew at its slowest pace in two years. The good news is that it was still a growth. Whether the growth will sustain in the domestic market or not is debatable, as austerity measures are expected to take a toll. However, exports are picking up, which is a silver lining.

Bottomline? The chart patterns of S&P 500 and FTSE 100 indices recovered spectacularly last week. Global economic growth is slowing down, so it was more of a relief rally that the Greek crisis has been averted for now. Conservative investors can take some profits off the table. The more adventurous can use trailing stop-losses to ride the rally.