In the past few weeks we have highlighted how the FTSE has broken through its previous bullish trading channel, red region. 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.
Consolidation areas following a trend line break often fall into the retracement areas calculated from 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?
The expectation is that the buying interest from the retracement areas has now run its course, as we feel the market needs to attract fresh buyers here to break through the 5922 resistance at this attempt, and in order to break through the psychologically import 6,000 level. As a result we see current levels as looking attractive to those wishing to take profits, and even tempting to those looking for shorts, using the 5932 level as a stop area offering quite attractive risk/reward. With initial targets looking for a return move to the 5664 area.
Volumes over the Christmas period are traditionally light, in these conditions prices can be volatile, so even a break through 5922 in the coming days would need to be treated with caution. As a result the weak-handed bulls may be able to gain enough support for a break higher in the coming days, we would remain sceptical on its inherent momentum however until any follow through buying in the New Year. So for now we continue to see the risk/reward on trading shorts more favourable at current levels. A break up through, 6000 naturally has extremely positive longer term implications, but this would need to be confirmed in January.
The 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 major resistance area. Also on this chart is the upper resistance, black line, detailing how the sellers have kept materialising, to some scale, on any test towards the 6,000 area.
So over the weeks ahead we do expect a more heated debate between the two sides, as the two arguments continue to converge. 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. Whereas breaks through 6,000 would signal a positive longer term leg ahead for 2013.
The trend is your friend, so current moves down to the longer term bullish trend look relatively attractive areas for the longer term trader to add to long to positions. However due to the skewed risk/profile we do see any breaks under this trend as potentially triggering sharp moves lower. Leaving a bullish medium term stance for now, albeit with a very a close eye on this medium term trend line, preparing for stop and reverse trades. As the markets sets up for a period of volatility ahead early in 2013.