FTSE SUMMER ROUT REDUX

Well, right on cue, the FTSE is playing out per the script of the last 3 years moribund summer months with a quite severe downdraft now from only 4 weeks ago. At the lows last week, the correction was aronund 10% from the highs just shy of 6900.

Take a look at the chart below which shows the extent of the declines in 2010, 11 and 12. These drops varied from nearly 20% being cut from the index in 2010 and 2011, and just over 10% in 2012. We can see from the lower red line that the FTSE actually only stopped its declines when the RSI hit between 30 and 40 and that interestingly, a slice through the 50 week sma was seen on each occassion.

So, how does the current pattern fit? Well, we are only 4 weeks into this correction and June and July are not the most kind months to investors with historically pretty lacklustre returns being seen during this period… The weekly RSI has only just toed below the 50 line and has some way to go before it gets as oversold as in the last 3 years and, if the simple 50 day moving average of the past 3 corrections is used as a slice test through, then we could see another 5% downside that would take us to around 5900. Real worst case is a test of the support line at 5700.

I wouldn’t count out a right shoulder being formed on the chart too that takes us back to around 6400 or even 6500 before a possible lurch lower. In the short term however, the 4 hour technicals are quite oversold and sentiment is poor so we expect a bounce over the next few days.

CLICK THE IMAGE ABOVE FOR YOUR FREE GUID