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On the last four consecutive down days for the UK benchmark, price action has fallen below the 200-day moving average, declining some 1.25% below at its trough. The FTSE 100 is currently finding bids around the 6440 level, which is the 50% retracement from the highs of May this year to the lows seen in early July.
On the last five occasions when the price fell below what is generally perceived to be an important metric, the plunges were slightly deeper.
- October 2013 – 1.7%
- June 2013 – 2.7%
- November 2012 – 1.90%
- July 2012 – 3.0%
- May 2012 – 6.6%
So, based on the average of these recent pullbacks (3.18%), if the FTSE continues its decline we could see the 6300 level reclaimed.
Correction seems imminent
The weekly chart shows price action testing the 50-week moving average and the trend-line support from the May 2012 lows of 5178.
If we extend the first wave of the rally from this point, we can see that the market has key Fibonacci resistance at 6828. This has seen two tests in the past few weeks and thus marks the end of the final wave upwards, giving me the view that we are set to see a significant correction.
Price action is also two standard deviations below its 20-day moving average, and the daily RSI points to a slight bullish divergence. So with this in mind we may witness some upward moves before the next leg downwards. One would expect that the 100DMA (6578) should act as the last barrier to additional upside, but it’s more likely that 6490 may be sufficient to keep the index in a downside check.
The area to watch on the downside support is 6360. A break below here could see the 6060/70 level targeted in the coming weeks.