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In our last couple of reports we felt that the FTSE was looking solid in the near term trading range, red region. However we can see that both in the FTSE chart above and in the US daily charts below that the international markets have broken down in recent weeks, green region. This nervousness has created significant headwinds for any UK stock buyers.

The US markets have been under-performing in recent weeks and this continues. The retracement levels drawn on this chart, red lines, are calculated from the 2012 lows to the summer highs. These retracement levels are often useful over clear trends as seen over the summer. The FTSE has just moved down into the retracement channel, the 38.2-61.8% lines, signalling a period of consolidation ahead.

The Daily S&P 500 graph below describes how the wider US market has fallen down to its comparable 61.8% level. Illustrating that the relative US under-performance continues.

The FTSE has clearly broken the bullish trend from the 2012 lows, red region, but trend breaks do not have to equal new and opposite trends. More often markets consolidate for a period, often in the retracement levels thrown up from the previous trend. So while the FTSE holds ground above its 61.8% retracement level around 5,500 we do not see the buyers losing interest.

As a result the recent trading selloff would look to be offering a trading buy opportunity. Technical Analysts prefer to trade with the trend and we would appear to have moved into a trading range phase, so buying here would only be wise for the active. The more straight-forward trade remains a long S&P 500 and short FTSE 100 trade looking for this near term divergence to unwind.

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.

Over this period the market has posted a strong bullish trend as the index continues a strong recovery from the 2009 lows, and this trend is attempting to bring the market up to the 6,000 major resistance area. So over the weeks and months ahead we do expect a more heated debate between the bullish & bearish, with breaks above the 6,000 area, or moves under the longer term bullish trend line as offering the first clue on the direction of the next major leg ahead.

As a result the current moves down to the longer term bullish trend look relatively attractive areas for the longer term trader to add to long to positions.

The S&P had been in a strong bull trend, green region, however it has broken lower in the past couple of weeks and has set up a near term bearish trend, and following the election has even accelerated lower, down to the 61.8% retracement level.

Yesterday’s rally lifted the market up towards the 38.2% level and we would expect minor resistance to emerge on any further gains up to 1395. Under-performance and divergence compared to the FTSE 100 of this type is not that commonplace and would appear to offer up a Buy US, Sell FTSE trade for those looking for this near term divergence to unwind. 

We would see traders looking to buy on strength on any moves up through the 1395 area, and we will also keep an eye on the 20 Day Moving Average which may provde resistance. However consolidations of this type often take a while to resolve, so we do see a relatively tight upside potential on any first leg of buying, and would see short sellers keen to re-enter on any moves around 1394-1400. Leaving some near term buying momentum expected, but that the upside is seen capped, and likely to attract additional short selling.

Over the weekly timescale the graphs show us how the index has moved down to the medium term trend line, lower red line, and just broken through it.

A break of this nature normally would not be too concerning, the issue currently is that the FTSE has been looking much less optimistic in recent months, so the near term weakness in the US markets could be the start of a US re-evaluation of the buying seen from the 2009 lows. If this was the case we would draw up longer term retracement levels calculated from the 2009 lows to the 2012 highs as levels that could indicate where any such medium term breaks could find support.

While the 2011 highs continue to offer support however the current areas can be seen as interesting buying areas for the medium term investor, while the more bearish will be concerned that this may already be the first sign of a more major trend change ahead.

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