technical analysis overview courtesy of cantor index

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In the past few weeks we have highlighted how the FTSE has broken down through its previous bullish trading channel. We mentioned at the time however that a trend line break does not necessarily equal a trend change, and that often a period of consolidation occurs following a break of this nature and indeed a period of consolidation followed.

Trading after a trend line break often falls into the retracement areas calculated from the height of the previous trend, horizontal red lines on chart. The FTSE moved into this natural retracement area briefly following the US presidential election, but from this level found strong buying interest. The question going forward is if this buying has enough momentum to break the significant upside resistance, or if once again the buyers will lose interest?

On some light volumes and some immediate relief on the US ‘Fiscal Cliff’ news the market has posted an intraday break above 6,000 today, levels not posted since mid 2011. We suggested in our last couple of notes that over the thinly traded Christmas period the market may be able to post some moves through the 5,922 highs. So while the moves today are technically interesting, we will need to wait for additional confirmation, due to the time of year.

What is quite interesting is that often in major moves of this kind the UK market lags the US, however in recent weeks it has been the reverse. On the daily FTSE chart above we have also drawn the S&P 500, black line. We can see how the S&P since October has traded lower and remains well under these near term highs. The FTSE in comparison has moved above its comparable October highs. Over this period has been supported by a strong sterling which has moved from 1.52 in June to 1.63 currently.

Traders could attempt to short sterling here, but the safer trade would be to sell the FTSE and buy the S&P 500 expecting this currency led divergence to unwind in the coming weeks. Through the autumn and into Christmas we remained quite nervous on the sustainability of this near term buying. The market pushing through 6,000 is a key first hurdle to opening up a much more bullish outlook for H1 ahead, as above however, we still require confirmation. Traditionally this confirmation comes with the S&P 500 also posting higher highs.

As a result the 1471 September 2012 high on the S&P 500 is a pivotal level to monitor in the days ahead, without such confirmation we remain nervous of a possible profit taking led snap lower.

he 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. Over this period the market has posted a strong bullish trend, lower red trend line as the index continues a strong recovery from the 2009 lows. This trend line is attempting to support the market up to the 6,000-6,100 major resistance area.

A resultant break in either direction is unavoidable; the only question is how sizeable this move could be. Breaks under the longer term bullish trend line could see rapid moves down to 4783, the 2011 lows and the 50% retracement level highlighted. However breaks through the 6,000-6,100 would signal a positive longer term leg ahead for 2013. The FTSE has posted a decent start to 2013, moving intraday above 6,000. However until the 2011 highs are breached, and the higher highs are confirmed by comparable higher highs in the US markets, the risk/reward remains highest that the FTSE could rapidly drop 500 early in Q1 against gaining 500 points in a rapid move.

In summary then the FTSE has posted a very strong move from the 2009 lows, and rallying up through 6,000 is a strong start to the 2013. The upside potential has therefore improved, but we do still feel it is too early to turn outright bullish.

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