Technical Analysis - FTSE 100

Monday, October 21, 2013, Marketing Communication FTSE 100, Daily, Semi-log The FTSE has continued to find support from the 38.2% retracement level, following the break down to the 61.8% level in June. The lower chart details how the FTSE continues to be pulled higher by the more optimistic S&P 500. The S&P 500 has posted a series of higher highs from May, while the FTSE has to date posted lower highs from May. The likelihood is that the FTSE will break the July highs just under 6700 buoyed by the positive impact of the S&P 500. The sentiment in the UK has improved in recent months but the tone remains cynical on whether all time highs are warranted. Whereas in the US the low interest rate environment, fueled by ongoing QE, has allowed the S&P 500 and Dow to post multiple fresh all time highs in recent weeks. As a result the outlook for the FTSE is positive, albeit due to being dragged up by the US. The more medium term investor may see value in buying the FTSE and selling the S&P 500 expecting this under-performance to unwind. However this would be more of a view on QE tapering than a technical view. As this US out-performance is set to continue while Fed actions continue. As yet the stochastic have not turned lower and price remains under the 6700 level, so the current bullish trend could continue for a few days. However on any continued near term strength up to and around 6700 we suspect the profit takers will move in to some scale. This could pull the FTSE 100 back towards the 38.2% level in the next few weeks. Any such near term selling is not expected to turn into anything more significant however and would again be seen as an attractive entry level to buy into the market as the US continues to lead the way higher. FTSE 100, Weekly, Semi-log Last updated, October 2013 The graph above throws up a possible medium term Elliott Wave count on the FTSE 100. We can see how from the 2009 lows there was a fairly clear 5 wave impulse move higher, red 1-5, followed by a simple expanded flat abc correction. From the 2011 lows the FTSE has posted a new impulse wave higher. Indicating the FTSE 100 is preparing a more sustained move up to fresh all time highs above 7,000. A general guideline in Elliott Wave analysis is that Wave 5 often relates to Wave 1, particularly when Wave 3 is larger than Wave 1, as in this case. Projecting the height of Wave 1 onto the lows of Wave 4 gives a medium term upside target on the FTSE around 7,220. These highs would allow the FTSE to match the positivity posted in the US markets and post new all time highs. This optimistic outlook remains while the 6,000 support holds. S&P 500, Daily, Semi-log The S&P 500 continues to drive the international markets higher, and the last leg higher was signaled with Candlestick Morning Star pattern, on the lows for October 10th. Following this pattern however the price action does appear to be over extended in the near term. The bulls will see the recent price action as a bearish rising wedge, but this pattern is only confirmed by the price action breaking the lower diagonal support line, on such a break the resultant selloff can be rapid. While the price action does appear vulnerable to some profit taking the outlook is not favourable to short sellers due to the strong underlying trend. Leaving a buy on weakness stance seen for the index in the days ahead, profit taking seen for the more active, with breaks under the October lows at 1646 required to turn more negative. FTSE 100, S&P 500 Overlay Graph Graph detailing the clear out-performance over the past year of S&P 500, black line, over the FTSE 100, blue line. As it shows how the S&P has posted higher highs from May 2013, black dotted line, while the FTSE has posted lower highs, red dotted line. 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