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Monday, May 27, 2013

Stock Index Chart Patterns: S&P 500 and FTSE 100 – May 24, ‘13

S&P 500 Index Chart

S&P 500_May2413

The S&P 500 index has been in a tear-away rally since the intra-day low of 1343 in Nov ‘12 – touching a new life-time high of 1687 on Wed. May 22 ‘13. But it turned out to be a high-volume ‘reversal day’ (higher high, lower close) that often marks the end of a rally.

The index corrected during the last 2 days before the Memorial Day long weekend, but received good support from the 20 day EMA. Blog readers received advance warning about the possibility of a correction in last week’s post, and were advised to book part profits.

Daily technical indicators have corrected from overbought conditions. MACD has crossed below its signal line inside its overbought zone. RSI and Slow stochastic have dropped from their overbought zones, but remain above their 50% levels.

Can the index correct some more? The possibility can’t be ruled out. High volumes on down days is bearish and indicates distribution. The index is trading 150 points above its 200 day EMA – such a wide gap is unsustainable. But this is a bull market correction – so the dip should be used to add to existing holdings.

The US economy seems to be improving. Initial claims of unemployment dropped. Durable goods orders rose 3.3% in April after slipping 5.9% in March. The housing market is recovering. Inflation remains low. These are bullish signs.

FTSE 100 Index Chart

FTSE_May2413

The FTSE 100 index charged up to a new 4 yr high of 6876 on Wed May 22 ‘13, backed by strong volumes. However, profit booking ensued on the next 2 days, and the index closed 1% lower on a weekly basis. The 20 day EMA provided good support to the index.

Daily technical indicators have corrected from overbought conditions, but remain bullish. MACD has dropped down to touch its signal line below the edge of its overbought zone. RSI and Slow stochastic have fallen sharply from their respective overbought zones, but remain above their 50% levels.

Some more correction is possible. The dip can be used to add to existing holdings. There is no immediate threat to the bull market.

Bottomline? The 1 yr daily bar chart patterns of S&P 500 and FTSE 100 indices are showing the effects of profit booking – possibly triggered by the likely tapering down of QE3 in the next few months. Bull markets remain intact. The corrections can be used to add.

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