In the past couple of weeks the FTSE has posted some minor profit taking, bringing the index off the early 2013 highs. As yet no major technical damage has been done on this selling and the price action remains in the bullish trading range, which itself is an acceleration within the bullish medium term trading range, red areas.
The Gold circle flags up an interesting candle formation, as a possible Falling Three candle pattern has formed. The standard pattern has three small white trading days contained by two large negative days, with the last trading day posting a fresh low for the pattern. It can occur however with just two days of central price action, as in this case. This pattern essentially highlights a double Harami pattern, where the first bearish day, itself a bearish engulfing candle pattern, was then followed by two inside days, signalling the a possible end of momentum to the selling, however the strong selling that materialised on the last day, which opens under the close of the previous day, and then closes at a fresh low, often signals some further weakness ahead. The only slight caveat is that ideally you would want to see this pattern after more of a defined minor bearish trend.
The RSI trend line has been breached on this near term profit taking which is slight concern, but RSI should be used a confirming indicator not a trigger, so while the price action remains in the strong bullish trend posted since November 2012 there would seem to be no major concerns here, indeed even a break under this near term trend would only open up a possible move to the lower end of the more medium term trend down at 5,800.
So in summary the FTSE needs to post quite considerable falls in the weeks ahead in order to negate the positive moves posted in the recent weeks. The short term profit taking could continue for the week ahead, however the risk/reward is seen as poor from the short side. Traders could use any breaks above the recent Falling Three candle pattern as buying areas as this could signal a bullish flag formation. Leaving a hold long stance for now, add on breaks above current flag formation, standing aside from the Falling Three except for the very active. Over the more medium term we would see investors reducing on breaks under the strong trend from November 2012.