technical analysis overview courtesy of cantor index

By Swen Lorenz 25 September 2012

2 mins. to read

FTSE 100, Daily, Candle

Last week we felt that the FTSE was looking solid in the near term trading range, red region, but that the probability looked highest for a near term bout of profit taking to bring the index down to the lower end of the trading channel. So the moves in the past few days have been largely as expected.

The FTSE remains well under its comparable 2011 highs, and even under its March 2012 highs. This is interesting as the S&P 500 has broken its 2011 highs, and is now just 100 points under its all time highs around 1565. Simple Dow Theory tells us to remain cautious while two major indices fail to confirm higher highs.

Also included this week is the On Balance Volume (OBV) for the FTSE 100. Generally you would like to see “buying on strength” and “selling on weakness.” Where higher highs in the FTSE are matched by higher highs in the OBV. In hindsight we can see how during the Jan-Mar 2012 trend higher in price the OBV was flat lining, the first signal of a possible reversal ahead. In May we had the double divergence, with both the RSI and the OBV posting higher lows, diverging from the lower low in price, indicating buying interest was emerging.

So over the past few months the OBV has proved to be a useful indicator to monitor, especially if it was in line with any RSI divergence. We mention this as the current price action has posted higher highs, but this has not been matched by higher highs in OBV. This is only a warning sign, as the Jan-Mar 2012 moves indicate that this divergence can remain in place for some months. So we would need confirmation from the price for any such break, but the bears will be readying the sell orders for any potential trend break that may emerge.

Trending ranges often do not last much more than 3 test one side of the channel and 2 on the other, so the odds are increasing for an eventual break, but the best kept secret on Technical Analysis is not to attempt to predict the markets, merely to simply be prepared for the breaks when they eventually occur.

So for the moment the FTSE has continued to post a solid H2 recovery and the index remains in a strong near term bullish trend, red region. (The trend is your friend). These areas will be seen as solid buy areas for the bargain hunters and as a result we would expect to see support from the current near term trend. Bearish arguments are growing however and on any trend break the resultant sell-off could be quite rapid, leaving a moderately bullish near term outlook, but with the need for close monitoring of stop levels for any bout of increased volatility which could be looming. Any downside breaks would open moves to the lower end of the medium term trading range, see below.

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