technical analysis overview courtesy of cantor index

Last week we felt that the FTSE was looking solid in the near term trading range, red region, and that buyers could materialise at the low levels of last week, instead we have seen how the index continued the near term weakness and moved  down to the lower end of the trading arrange we have been monitoring for some months now. So the near term weakness has been a touch more than anticipated, however while the FTSE remains within this trading range we do not feel the need to amend the overall bullish outlook for shorter term.

There are downside concerns, but we will need price action to confirm the nervousness before any profit taking should be employed. The FTSE has remained within a tight trading range from the lows of 2012, however the last high failed to post a move to the upper end of the channel, the first warning in simple trend theory that the move is running out of momentum. Also tight ranges of this type often do not last much longer than 5 points tested. So far we have 3 tests of the upper end of the channel, and 2 confirmed moves off the lower, with the current action the possible 3rd. Technical Analysts do not believe that markets are a Random Walk. Tossing of a fair coin is for example is. A coin toss of heads, heads, heads, does not increase, or decrease, the odds of heads on the next coin toss.

However technicians believe that price action DOES increase/decrease odds of the next move. As a result the longer a trend persist the greater the likelihood that the next move will be the eventual break. The major technical caveat to this is however, is that the trend is your friend, and you do not call the break, you simply wait for it to be confirmed.

Many technical analysis reports fall into the trap of attempting to call the markets, we feel it is more sensible, and over the long run more profitable, to simply wait for the market to tell you of its direction. As a result current areas once again look tempting to the near term buyers and we would not attempt to call the break lower here.

So while we do see some nervousness that the current tight trend will not continue over the medium term, we will maintain the bullish stance for now. With a red flag that we can see the bears readying positions to sell and even open short positions on any break lower.

Without a confirmed break lower, under the near term trend, the buyers are expected to continue the past few months pattern and see the current low levels as too tempting to ignore and that the FTSE is set to post yet another move towards the psychologically important 6,000 area early in Q4 as we move into the traditionally bullish Q4 period.

FTSE 100, Weekly, Candle

The situation on the Weekly chart will take some time to change greatly, so the text below may remain broadly same week to week unless major levels are broken. As with the monthly chart below however we will update the graph each week, and post all the text so that new readers will have all the information to hand.

For the Weekly chart we can see how the FTSE 100 has clearly had a hard time breaking up through the 6,000 area over the past couple of years. We can also see how the current price action could well be the price moving down the right shoulder of a ‘head and shoulder’ pattern. It is much too early to call this pattern formally here, as the neckline would need to be breached, around 4,775, but it is still worth noting as this could result in medium term nervousness. Also in recent weeks the S&P 500 and the Dow  have both posted higher medium term highs, suggesting the FTSE is set to do the same, which would of course negate any possible bearish H&S.

Also on this chart we have drawn some potential Elliot Wave counts. With the 2009 to 2011 move being a five wave impulse wave, and the resultant correction the traditional abc pattern. This labelling follows the standard Elliot convention that Wave 4 must not overlap with Wave 1. Also as is typical the abc correction has found support from the end of Wave 4.

One method in using Elliot Waves is to create a trading channel off waves 2,4 and projecting the parallel higher. Wave c of the reaction broke through this support and also interestingly found support off the 50% retracement level, central green line.

While the price action is under the 2011 highs trend followers will be concerned over whether the current trading range, red region, is the start of a fresh 5 wave impulse wave higher, or part of a more complex WXY correction.

So in the interim we can see the current trading range, red region, dominating the trading mood, with a positive bias, with any breaks above the 2011 highs allowing more significant long term upside objectives to be drawn.

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