technical analysis overview courtesy of cantor index

In the past few weeks we 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.

A consolidation has followed. Trading following a trend line break often falls 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?

We suggested last week that over the thinly traded Christmas period the market may be able to post some moves through the 5,922 highs. The graph details how the FTSE has managed such a break in recent days. As last week however we remain concerned that this is a not a ‘genuine’ break, and will require additional confirmation before we turn more bullish.

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. We still see that the next 400-500 point move on the FTSE for H1 2013 as being more likely to be a retracement down to 5,400, than a break up to 6,400.

As a result we see still see current levels as looking attractive to those wishing to take profits, and even tempting to those looking for shorts, waiting for the ‘real’ market to return in 2013.

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 monthly timescale naturally takes the long term view so the commentary in this section will only be updated as when market events dictate. So regular readers of this report will only need to read the monthly and weekly sections on a relatively infrequent basis. However we include all the information to give new readers the full picture.

The Monthly graph for the FTSE 100 quite clearly shows how the index posted an extremely powerful move into the end of the last century, first red line.

From the all time highs in the index at 6950 the FTSE slumped 50% to the 2003 lows. In hindsight we can see this move as an understandable and even justifiable re-examination of the strong gains posted in the previous 20-30 years. The market currently remains well above these lows, which tells us that the Eurozone sovereign debt issues, technically at least, are not as significant as the general press would have us believe.

The FTSE remains in a trendless state, having posted lower highs in 2007, and higher lows in 2008, converging black lines. Retracement levels calculated from the all time highs to the 2003 lows create some interesting levels. We suspect that these levels will continue to be of use for the quarters ahead, a break back under the 61.8% level would suggest a new trading range between 4367-5215 would be possible. This area also coincides with the possible neckline of a major bearish H&S Pattern. Which would suggest strong support seen on any weakness down to 4775.

In summary then the FTSE 100 remains in a trendless state over the long term, with lower highs and higher lows, trading in the shadow of the TMT sell-off. The FTSE currently remains more neutral in its outlook than the more optimistic S&P 500 and Dow, and breaks under the medium term trend line, far right red diagonal line, could trigger the start of a more significant retracement, as seen with the breaks lower in 2001 and 2008. Setting a cautious long term tone for 2013-2014, with breaks above the 2010 highs required to open up more optimistic long-term targets.