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Last week we felt that the bearish argument had not been won, despite the minor panic when Spanish yields hit fresh record highs above 7.6%. So the light rally posted in the past few days has come as no real surprise. The question for the days ahead is whether this buying can continue to push the FTSE to fresh near term highs, (above point 3) or fail around current levels and move once again back towards the 50% retracement area, central green region on graph, around 5,450.

Over the summer the FTSE has on four occasions attempted to break through the upper retracement area, upper green line, but three times it has failed, so we would again suspect that traders would be keen to lock in some profits here. In the relatively light summer trading volumes this minor selling headwind could be enough to knock the index lower on this attempt. So while the outlook for Q3 largely remains optimistic in the near term we do see the index looking vulnerable to profit taking and would only see buyers interest returning on weakness towards 5450. As a result we feel less confident that the near term highs will be breached on this attempt.

Also of interest on this daily graph is the fractal nature when comparing it to the weekly chart below, as at first glance these two charts could be confused for each other. Both have posted losses in the first quarter of the graph, from which we have drawn retracement channels. From these lows the FTSE has posted 3 peaks, with the third peaking failing to post higher highs. Also the near term price action has posted a slowing bullish trend, black lines, and both have broken medium term bearish resistances, and current price action has just broken up the 61.8% retracement levels.

So if this pattern holds the daily chart may well prove instructive for the weekly outlook, especially if the upper retracement level is once again breached to the downside. The downside target on the Daily chart for a move of this type would be down towards 5450, with the comparable move on the weekly chart down to 5120.

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