That partial recovery was achieved on below average volume which indicates an absence of (heavy) selling but the very fact that it is now below the level of its MA is a sign of inherent weakness.

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Our analysis indicates that the FTSE is now in a situation of a growing vulnerability to further decline – in fact, to the probability of a fast fall to the 5000 area. Should that happen then the pattern of movement would likely be  few days to get down to 5400 then a few days holding at around that level followed by a possible ‘big one’ of 400 points or so over one or two days (only!) some time later. Then on down to the 4800 area for sure!

Not a pretty picture and, thankfully, not a guaranteed event (not yet anyway). For it to be avoided the FTSE must succeed in clawing its way back above the level of its MA. To calculate the potential for such a claw back we need to look at Wall Street for the likely degree of support.

The latest ‘FTSE Forecast’ report (available on request to admin@sharehunter.com) then takes a long hard look at the prospects for the US market indices.

But, as can be seen, yesterday’s move was quite emphatic –

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The FTSE’s European sister indices are pointing downwards –

German DAX, daily –

The Dax looks to be on its way down to the 6100 area and could be in process of swinging into a Downtrend (the weekly analysis will confirm the dominant trend).

French CAC 40, daily –

Yesterday’s move down did not break below short term support but it does look to be swinging into Downtrend and on its way down to the 2800 area.

The main hope for a bounce back rests with Wall Street. Neither the Dow nor the S&P 500 made a definitive down move yesterday. In fact, after their initial fall, they largely recovered and finished the day only marginally down – and, importantly, still above their support levels.

The DJIA, daily –

S&P 500, daily –

This does give some cause for hope that they and, in turn, the FTSE might recover some of the lost ground. That is the reason why we do not yet want to be taking short positions – although that day is coming closer – and will become an active proposition if the US indices do fall under their current support levels.

At ShareHunter our job is not only to provide top quality trading tips based on our technical expertise and experience but also to keep you appraised of the technical signals as to which way the markets are likely to move thereby helping you to avoid the disaster of being heavily invested when the markets plummet.

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We cite three positive signals why so -

1. The long ‘tail’ of the latest bar indicates that the market was tested to tempt any potential sellers out from behind the parapet – but they didn’t appear (as the index moved back up, not further down and closed back up near the high for the week).

2. The low of the week – where support for the market appeared – was at the level of the index’s 30 wk MA (which will often act, as this time, to promote a change of direction) plus, it remained above the 5600 support level.

3. The preceding bar (i.e. the previous week) was strongly bullish and last week’s action served to confirm the upward potential of the index.

The other side of this positive view point is that the index must stay above the level of its MA. A close below it and close below 5600 (which it would then be likely to do) would signal a reversal of positivity and the liklihood of a sharp decline to the 5400 level.

The positive potential for the FTSE 100 is reflected on (or is a reflection of) the positivity being shown of late on Wall Street.

‘Positivity’ and ‘potential’ are the main words to describe the recent performance of the UK, US and German markets but we must temper that with the caveat that some of our longer term indicators do suggest a more negative bias and continue to hint that a major reversal is still in the offing.

Tread carefully!

ore information and explanatory charts are available from the latest ShareHunter  ‘FTSE Forecast’ Report.

The FTSE 100, weekly -

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Accordingly, the FTSE rose and managed to poke its head above the 5700 resistance level. We cannot be certain yet that it will be able to get clear of the grip of the 5700 level resistance** but last week’s rise was quite definitive and begins to suggest that the 6000 level and possibly even a 5^th attempt at the 6055/6090 area resistance might be on the cards. This possibility is strengthened by the fact that the FTSE bounced up off the (5600) level of its 30wk MA which is, itself, rising.

** The support and resistance levels should be considered as strong elastic bands rather than steel girders; we always allow a 1% approx. margin for ‘stretch’. On this basis the FTSE’s close on Friday at 5772 is at the top end of the ‘stretch allowance’.

On Wall Street the support levels on the S&P 500 and the DJIA are also doing their job although, unfortunately, last week’s support was not particularly strong or definitive; note the relatively small size of the last green bar -

S&P 500, weekly -

The DJIA, weekly -

This leaves us with the possibility that the bounce up from the support levels may falter and not gather any pace and so cause the US markets to fall back below these support levels – in which case of course the FTSE indices would suffer reduction as well.

However, on the plus side, in neither case is the volume level above average – in fact the volume level on the Dow is considerably below average; this suggests that there is limited selling into the market which, in turn, suggests that values are not set to fall be very much, if at all.

In Europe we are presented with a bit of a mixed bag (of signals) at the moment.

The German DAX is still in an Uptrend as it dominant trend and it put in a positive week last week but it is a bit in mid-air and could yet fall to the level of its 30 wk MA (at 6310 currently) before it gathers enough support for a meaningful rally -

The DAX, weekly -

The French CAC 40 is getting weaker. Last week it tried, and failed, to find support at and to bounce up from the level of its 30wk MA, currently at 3244. If it cannot get and stay above its MA then it will be at risk of a gathering downward momentum which will take it down to the 2706 support level.

The CAC 40, weekly -

Conclusion:

As ‘bulls’ (currently at any rate) we do therefore need the US and UK indices to move up from their currently active support/resistance levels but such is the hesitancy being exhibited by the markets that nothing can be taken for granted. The warnings provided by some of our longer term trend indicators (outlined over recent weeks) continue to give cause for concern that a major downmove is far from being a remote possibility.

We all therefore need to continue to be sanguine about this market and to hold back from over committing to it.

The 5600 level on which the FTSE now sits is a level of support, principally because it is the current level of the FTSE’s 30 wk MA (note; the MA will, when tested by a fall to it, often act as a catalyst for a change of direction and a bounce).

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So what we now have is a relatively easy and straightforward picture …..

….. if the FTSE can bounce up from 5600 and break above the 5700 resistance then it is going to climb towards a test of the 6000 level and possibly make a 5^th attempt at a breakout above the 6055/6090 area resistance….

….. but if the FTSE cannot break above 5700 and, instead, falls below the 5600 support level then it is going to sink to 5400, possibly quickly; after which the 5000 level is likely to be tested.

So, the FTSE is using the 5600 and 5700 levels as tramlines and its breakout either way will show us whether we need to be Long or Short of the market.

Yesterday’s effort to recover was pretty paltry and so the FTSE is still vulnerable to further decline. There is so much extra risk that would be involved in taking a new Long position just now that makes the decision to hold back a sensible one.
Not until the FTSE has managed to climb back above the high of Tuesday’s sell off (at 5724) will we be able to feel any degree of certainty that, with a new low having been formed on the 5600 level, the recovery may gather pace. To invest long now would be ‘in hope’ that a recovery will occur and that is no basis for making an investment; we have to have a degree of certainty that share prices will rise, not just to hope that they will.

There is though good reason why the 5600 level should (continue to) provide support as it is the current level of the index’s 30 wk MA (which is a level that will often produce a change in direction) plus it is a ‘standard’ -6.25% down from the March’12 high at 5989 and also it is the same level as the March’11 low after the -8.33% fall from the previous (Feb’11) 6105 high.
So there is a lot going for the 5600 level as a support area. In turn, if it does not hold and the index falls below it then the implications are for a more serious decline.

The FTSE 100 is now testing the 5600 support level which may hold it for a few days but the signals suggest that 5400 is likely to be visited soon. Then, if 5400 is broken, the FTSE will embark on a full blown collapse!

There are positives that can be taken from other, influential, market indices. The wider UK market in the form of the FTSE 250 index is holding above its 11360 support level and refusing, at this stage, to signal anything other than a short term, and minor, correction.
Also Wall Street is continuing in its positive mood and staying above support levels with both the S&P 500 and the DJIA edging higher.
So, it rather boils down to whether it is the FTSE 100 or the other major indices that will show the way. It has happened before that the FTSE 100, comparative minnow though it might be, has led the way by being the first to start a significant decline which was then copied and accelerated by the bigger US market indices. But for that to happen this time it would mean that the US indices must retrace and fall back below their support levels. Not impossible but looking unlikely at the moment.
If it is the FTSE 100 that is out of kilter and the US indices continue to climb then it will indicate that a number of FTSE 100 stocks offer good value just now!
The coming week should provide an answer. Although such is the absence of any real sense of dynamism in any of the World’s markets of late that there remains the possibility of another week of dithering and lack of determination.