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Has The French Index Stabilized?

06/16/10 02:02:07 PM
by Chaitali Mohile

After correcting 600 points, the French CAC 40 Index has been consolidating near support. Will the index recover or take another plunge?

Security:   $CAC
Position:   N/A

The French CAC 40 Index ($CAC) formed a double top -- a bearish reversal formation under the resistance of the 200-day exponential moving average (EMA). The two peaks were formed at 4088-4086 levels. The relative strength index (RSI) (14) showed a negative divergence during the double-top formation, confirming the possibility of the trend reversal. We can see that the weak average directional movement index (ADX) (14) in Figure 1 surged above the 20 levels, indicating a developing downtrend. Thus, the bearish breakout of the double-top formation worsened and $CAC lost nearly 600 points from the top.

A neckline resistance of the previous inverted head & shoulders was the immediate technical support for $CAC. In the past few weeks, the index has been consolidating near neckline support. The support-resistance tool in Figure 1 shows the neckline resistance (red) is the current support (green) for the index. The RSI (14) is in a no-man's land between the 30 and 50 levels. The ADX (14 ) is indicating the developing downtrend at 24 levels, and the moving average convergence/divergence (MACD) (12,26,9) is plunging in negative territory below the zero line. Therefore, $CAC is likely to witness volatile consolidation. The 50-day exponential moving average (EMA) would suppress the bullish jump from the current support levels. These conditions make me suspicious about a bearish flag & pennant formation.

FIGURE 1: $CAC, WEEKLY. The index is resting with the neckline resistance converted to the support of the previous inverted head & shoulders formation.
Graphic provided by:
$CAC is consolidating after the huge declining rally of 600 points and the downtrend is developing. Therefore, the conditions are very much favorable for the bearish flag & pennant continuation pattern to form. The pattern would get confirmed if $CAC breaks the support line. The breakdown would further damage the index by plunging to 2800-3400 (the breakout level) minus 600 (length of the flag pole). Traders need to stay alert. During consolidation, $CAC is likely to challenge the 50-day EMA, offering a short-term buying opportunity.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

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