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FTSE 100, Daily
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In our last couple of reports we felt that the FTSE was looking solid in the near term trading range, white region. However we can see that both in the FTSE chart above and in the US daily charts below that the international markets have broken down in recent weeks, red region. This nervousness has created significant headwinds for any UK stock buyers.
The medium term trend has been broken, white line, but as yet the FTSE has not posted as clear a down trend as the S&P 500 and Dow, see below. So for the moment the bulls do not look overly concerned and could even be tempted in as bargain hunters at current levels. However breaks under the lower end of the current trading range would increase concerns that the FTSE could mirror the moves seen in the US.
The clearest trade position remains a buy on the US markets versus a short on the FTSE expecting the recent out-performance of the FTSE 100 to unwind in the coming days. For the outright trader we can see some buying interest here, albeit with tight stops under last week’s lows. The more cautious trader could already be looking at the recent medium term trend break as a reason/excuse to take some of the profits made from the summer 2012 lows.
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FTSE 100, Weekly
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Last Updated, November 5th, 2012
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. We can also see how the current price action could well be the price moving down the right shoulder of a 'head and shoulder' pattern. It is much too early to call this pattern formally here, as the neckline would need to be breached, around 4,775, but it is still worth noting as this could result in medium term nervousness. Also in recent weeks the S&P 500 and the Dow have both posted higher medium term highs, suggesting the FTSE is set to do the same, which would of course negate any possible bearish H&S.
Also on this chart we have drawn some potential Elliot Wave counts. With the 2009 to 2011 move being a five wave impulse wave, and the resultant correction the traditional abc pattern. This labelling follows the standard Elliot convention that Wave 4 must not overlap with Wave 1. Also as is typical the abc correction has found support from the end of Wave 4.
One method in using Elliot Waves is to create a trading channel off waves 2,4 and projecting the parallel higher. Wave c of the reaction broke through this support and also interestingly found support off the 50% retracement level, central blue line.
While the price action is under the 2011 highs trend followers will be concerned over whether the current trading range is the start of a fresh 5 wave impulse wave higher, or part of a more complex WXY correction lower.
So in the interim we can see the current trading range dominating the trading mood, with a positive bias, Due to the US. With any breaks above the 2011 highs allowing more significant long term upside objectives to be drawn.
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FTSE 100, Monthly
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Last Updated, November 5th, 2012
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, red 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 remains more neutral in its outlook than the more optimistic S&P 500 and Dow.
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S&P 500 Graph, Daily
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The Daily S&P 500 graph above details how the US market has just started to show a slowing of buying momentum in the recent weeks.
The S&P had been in a strong bull trend, white region, however it has broken lower in the past couple of weeks and has set up a near term bearish trend, red regions, and following the election has even accelerated lower, green line. Under-performance and divergence compared to the FTSE 100 of this type is not that common place and would appear to offer up a Buy US, Sell FTSE trade for those looking for this near term divergence to unwind.
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S&P 500 Graph, Weekly
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Over the weekly timescale the graphs show us how the index has moved down to the medium term trend line, lower red line.
A break of this nature normally would not be too concerning, the issue currently is that the FTSE has been looking much less optimistic in recent months, so the near term weakness in the US markets could be the start of a US re-evaluation of the buying seen from the 2009 lows.
While the 2011 highs continue to offer support the current areas can be seen as interesting buying areas for the medium term investor, while the more bearish will be concerned that this may already be the first sign of a trend change ahead.
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Dow Graph, Monthly
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Last Updated, November 5th, 2012
Above is just a quick chart on the Dow, highlighting that despite the wider market nervousness the Dow pushed on towards its all time highs. This long term chart highlights how the index posted an extreme move higher through 1990-2000. This move is all the more powerful as this is a semi-log chart.
Unlike the FTSE the Dow posted fresh all time highs in 2007, so the Dow has posted a long-term broadening pattern with higher highs and lower lows, compared to the FTSE 100 which has posted a tightening formation over this period.
So the long term bulls will be hoping that the Dow can push through its major long term highs and post a bull trend comparable to that seen in the 1980-2005 period. While bears will feel the index will fail at this current attempt and more closely match the series of failures posted between 1965-1985.
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S&P 500 Monthly
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Updated September 10th, 2012
On the S&P graph we can see how the broader index has attempted to follow the Dow higher, and has now confirmed the Dow as it has also posted fresh multi year highs in 2012. Using basic Dow Theory this confirmation between these two broad equity indices highlights the apparent positivity in the market.
What is also worth noting is that the US index has posted a stronger longer term bullish trading range from the lows of 2008, compared to the flatter trading range set up on the FTSE over the same period.
So currently the most bullish index is the Dow, then the S&P with the FTSE bringing up the rear. If the FTSE was able to post fresh multi year highs, confirming the more optimistic US indices, then we could see traders looking to buy the FTSE and selling either the S&P or the Dow looking for this longer term divergence to unwind. However the FTSE would need to confirm the bullish outlook first and this position should not be entered pre-emptively as these conditions could remain in place for some time.
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Graphs
Graph images are created on Bloomberg, and remain under copyright to Bloomberg
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