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(Click on chart to enlarge)

The levels to watch for on the FTSE 100 area -

1. 5760 – if the FTSE closes above this level then continuation of the rally is confirmed and will likely take the index up to the 6090 level area or

2.5440 – if the index closes below this then the Downtrend continues and will likely drag it down towards the 5000 level area (and then lower).

The wider UK market, as evidenced by the FTSE 250 index is still showing a whole lot weaker than the FTSE 100 and is much further away from confirming any continuation of its, so far, short and half hearted rally -

The FTSE 250 -

The levels to watch for on the FTSE 250 are -

1. 10710 – if it closes above 10710 AND above the level of its 30 wk MA then it will rally up to the 11360 area or

2.9420 – a close below 9420 will see the index at 8850 very quickly thereafter.

When you recall the 3500 level that the FTSE 100 reached in 2002/3 and 2009 (Lehman!) one has to wonder why it is still some 1800 points higher today despite all of the doom and gloom of dire consequences being peddled so vociferously over recent weeks.

One can only assume that the markets must be supremely confident that the politicians will devise a satisfactory answer (and, in which case, we are running the risk of being too aggressively short).

But, against that, we need to highlight the potential effect on the market, and to the FTSE 100 in particular, if the politicos  do not get it right; that is represented by the potential for the S&P to crash to 750 and the DJIA to 7000 and for the FTSE to crash to the 3500 area (in which case we might not be short enough!) – as illustrated by the monthly price chart -

The FTSE 100 (monthly) -

Every day last week was a down day. This indicates that the market is getting weaker and makes the idea of a recovery rally that little bit more difficult. However, we must not underestimate the potential for an engineered year-end rally on the markets.

Well, if that is true and if the stock markets follow a 1930’s pattern then we are all in for a torrid time  -

Here is the DJIA from the 1929 crash thru’ to 1933 (weekly prices) -

(Click on chart to enlarge)

But we have to observe that the markets have, over the last few months (of dire and worsening predictions), held up remarkably well and, so far at least, show little sign of the calamity of a 1930’s style crash and attrition period.

Here is the Current DJIA from 2007 to date -

For the present Dow to mirror the 1930’s Dow it would first have to fall below the 7000 level and then drift down over the succeeding two to three years towards the 1470 area (-89% from the 13362 October 2007 high). That hardly looks likely! Even a collapse to the 7000 level, although not impossible to consider, does not look very likely.

Turning to the FTSE 100, the effect of a 1930’s style collapse and attrition period would involve first a crash to the 3475 level (which will happen if the 4782 support level is broken!) and then a drift down towards the 750 area! -

Again, that hardly looks likely given the degree of support that the 5000 level has been providing for the FTSE let alone the 4782 level which would have to be pierced by a strong down move.

In fact, what seems to be happening currently is that the FTSE 100 is preparing for a sizeable jump. It has been receiving good support and is now in process of breaking out above the 5400 level (which we reported previously it was likely to reach). And now we find that it may be able to gain ground above the higher level of 5650 that we also highlighted earlier; there is now good prospect that the FTSE could jump to the 5770 level before falling back again.

The FTSE 100 (weekly prices) -

But, just so that we don’t entirely lose our ‘jeremiah’ reputation – a rise to 5600 or even 5770 would not preclude the possibility of a subsequent collapse. And any such collapse would have an even bigger impact coming, as it would, from an higher level and perhaps when expectation of it had lessened – there is nothing that old Damocles likes to do more than to swing that great sword of his when we mere mortals least expect it!

Alan Saunders           Chief Analyst,  ShareHunter

It is this sort of practical and straight forward analysis that has helped us and the ShareHunter subscribers not just to position themselves correctly and to make money by trading with the dominant trend but also, and so importantly, to avoid losing large chunks of their investment capital by avoiding the sudden downturns in share prices.

Here, by way of example, area  few extracts from The ‘FTSE Forecast’ during 2011 so far -

1. 31st Jan  – “…if the 5770 level holds then the FTSE will rise to 6055 again but if it fails then the FTSE will fall to 5000…”

2. 13th Feb – “…Our special ‘Momentum Indicator’ is continuing to point towards a coming sharp fall on the markets…”

3. 13th Mar – “…The signals presented bu our ‘Momentum Indicator’ show a disturbing divergence for the FTSE (even more pronounced for the S&P 500); something just isn’t right and we all need to be watchful (for a crash)!…”

4. 25th Apr – “…A triple Top is forming – this could lead to a sharp downturn in the FTSE….”

5. 2nd May – “…The FTSE is at an important ‘Either/Or’ juncture – Either it is going to break upwards OR it is going to crash…”

6. 5th Jun – “…The FTSE is finely balanced and could soon start an extensive decline…”

7. 19th Jul – “…Do not be tempted to buy shares now. A Painful time is now due to follow. A fall is approaching and it could be fast and furious….”

8. 15th Aug – “…The markets are building towards a decisive downmove…”

9. 4th Sep – “…Share prices are likely to fall again – and will take the FTSE down to the 4782 area…” (NB. the FTSE fell to 4791 on the 8th Sept!!!)

And, for Autumn/Winter 2011 – “…The FTSE will fall again to the 4782 area and then likely crash as far as the 3500 level”

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But we anticipate (expect!) that not one of ShareHunter’s subscribers  (well, those of you who read the ‘FTSE Forecast’ each week anyway) got caught holding Long trades in such a dire crash.

We have been consistent over many months now in identifying the dominant trend of the markets and of the FTSE 100 and S&P 500 in particular and warning of the likely falls to follow as the trend strengthened and we have been consistently accurate with our forecasts of the levels that the FTSE is likely to reach.

We would, of course, deny that this is a “We told you so” blog …(but you ‘re right. It is).

Today the FTSE has reached the 5000 level that we mentioned in Sunday’s ‘FTSE Forecast’ report – but it hasn’t closed below it, yet! Should it do so then it will certainly fall to test the 4782 level and, should it then close below 4782 (for two consecutive days) then its next major low is likely to be the in the area of 3500!

So, it could be a case of…”a 5% in-a-day crash to 5000?…you ain’t seen nothing yet”!! We wouldn’t mind being wrong but the analysis shows that if 4782 fails as a support level then that is what is going to happen.

We are all due for some exciting times in the coming weeks. And, one day there is, of course, going to be a turning point when an investment into shares is going to create huge wealth over the longer term.

It would pay you to get the support of ShareHunter’s consistently accurate analysis as your guide. Visit www.sharehunter.com and subscribe for just about the best  stock market and share analysis that there is.

Here is the chart of the FTSE 100 using weekly prices (which is the only way to properly determine the dominant trend of the market) -

The FTSE 100 is likely to fall back down again to the 4782 level where it will hope to find buyers jumping in so allowing it to rally back up the scale. But, if it fails to find sufficient support and falls, and closes, below 4782 then it will be destined to go quite a lot lower; as we have indicated in previous reports, probably down to the 3475 level area.

Analysis of the wider market doesn’t show any greater degree of support for a meaningful rally. The FTSE 250 looks likely to drift down towards a test for support at the 8850 level area -

It could prove to be a costly mistake to be buying into this market (other than on a very short term basis).  Support from across the Atlantic looks very unlikely and the FTSE is in a Downtrend as its dominant trend and, whilst that remains in force, lower share prices are likely.

Looking at the long term chart, the answer has to be – against the 3500 level lows put in by the FTSE from 1995. But that is a very short lived, if not illusory yardstick.  If you had bought at point “X” for the longer term then, at point “Y” you might have been happy, but at point “Z” it was all a waste of time -

(click on the chart to enlarge it)

“Buying for the longer term” is a ‘buy and hold’ philosophy which, in the modern market era, can be seen to be a high risk strategy. Why buy now when there could soon be a chance that you might be able to buy at point “EQ” – and then we will tell you when another point “A” looks likely.

Now, that is a strategy for the “longer term”!

(Click on the chart to enlarge)

at Friday’s close the FTSE was at 5129 – some way below the halfway level of the month’s spread. This is a sign of its inherent weakness and says to us that the 4782 level is likely to be tested again soon.

And that is when its importance will be realised; if 4782 fails to provide support and the index falls below it then the FTSE 100 will be destined to fall towards a third test of the 3475 level.

However, there is the possibility that there will be some support at 4782 which will allow a short recovery rally (as bottom trawlers jump in and buy at what they perceive is “good value”) but the emphasis here is that it is likely to be a short lived rally as, unless the trend changes, the Downtrend will resume.

With the Downtrend established as the FTSE’s dominant trend there is a very real prospect that that is what is going to happen. (the old adage “the trend is your friend” holds good. If you know the current dominant trend then you have a pretty good idea of where the market is likely to go next.).

It has, for example, not only warned subscribers of the impending stock market crash many weeks before it occurred but also it gave the warning on the first day of the crash that further were falls due.

We also highlighted the exact level at which the FTSE would stop falling and turn around.

It just doesn’t get better than that!

The low for the week was right on the support level that we had identified for members a week earlier!

The FTSE is now in something of a state of limbo. There is the possibility that it might claw its way back up to the 5670 area and even, possibly, to the 5750 area as it is a fact that there is always a positive period that follows such a steep collapse as the FTSE has suffered over the past two weeks.

This ‘limbo’ period is a dangerous time as a sense of ‘recovery’ can fill the air and buyers begin to lose their caution and start doubling up on their earlier purchases so as not to miss out on the expected recovery (the earlier concerns about the state of the market being explained away as “over reaction”).

But, beware, because it is a fact that, until it changes, the market is still in the early phase of a stage 4 Downtrend which, by its very nature, will follow through with more declines in share values after the bounce. It has happened before -

Click on the cart to enlarge it

It is likely that the FTSE 100 will fall to test the strength of the support at the 4782 level again at some point. If it should close below that level then we can expect more falls and, perhaps, a decline all the way down to the 3475 level again.

So, enjoy and benefit from any sustained bounce that the FTSE may provide over the coming weeks but remember it is in a Downtrend as its dominant trend and that it will, therefore, fall back again.