Is this a top for the FTSE?

As the FTSE tumbles for the second consecutive week, it is worth understanding whether we are looking at a short-term blip or something more meaningful.

Canary Wharf
Source: Bloomberg

The FTSE 100 has come full circle in the first four months of 2016, with the index returning to the opening price once more today. There is no doubt that many will be wondering whether the ‘Sell in May’ theory is coming back into prominence given recent weakness in the index. With that in mind, it is worthwhile understanding whether recent selling is indicative of something more widespread, or simply short-term.

The weekly chart below provides a good overview of the recent years, which turned from very gradual gains to sharp and volatile swings since the 2014 low of 6070. It also puts the current downside into some context, within which we can see if there are similarities of previous periods of downside. 


Highs and lows

In the 12 months since the all-time high of 7127, the index has been creating lower highs and lower lows from a longer term perspective. While the past three months have seen a substantial distance recovered, the crucial 6489 resistance level is clearly elusive. Until we see a closed candle above this level, the index remains within a downtrend from a long-term perspective.


Looking at the stochastic oscillator, there is a clear case to be made that we were due some form of a correction lower, given that the indicator was at the highest level for over a year. This came at a time when price punched through the upper Bollinger band for the first time in over two years.

Looking at the MACD histogram, there is certainly similarities with the early 2015 selloff, with both seeing a rise into the 50 mark, before turning lower. A falling MACD is typically a leading indicator, which certainly preceded the top in April 2015.

Weekly outlook

The existence of a shooting star candle at the top of this recent highly extended rally, where the top temporarily breaches the Bollinger band and touches the 200-week simple moving average, points to a very good chance of a reversal. Should this represent a top, it is worth noting that the FTSE has seen very strong moves in the last 18 months, where the shortest leg of this downtrend measuring 720 points, in the August-October 2015 rally. As such, there could be some distance yet to travel should we be seeing a top.

Are we seeing a top?

The daily chart allows us a more detailed picture for the index, with weakness dominating the landscape over the past two weeks. Given the wide swings within the index since the second-qaurter of 2015, the stochastic oscillator provides the perfect indicator to use for reversals. It is clear that the stochastic has managed to warn of possible market peaks and troughs through this period. With the market currently approaching the 20 mark and beginning to turn, we could see the FTSE bottom out from here.

The clear overall picture is one of higher highs and higher lows, since the February low. Given the more bearish picture evident within the weekly chart, we would need to move away from this bullish trend of higher highs and higher lows. As such, for a more bearish picture to emerge, a closed daily candle below 6006 would be required. Should that occur, a move down towards the August 2015 low of 5768 is a distinct possibility in a move which could form a second shoulder to a long-term inverse head and shoulders formation.

However, for now, we remain within a clearly defined uptrend and as long as price remains above 6006, another leg higher remains the most likely move. Given the importance of the 6489 resistance level, it could make more sense to be bullish upon a close above that level. Upon which, the 6672, 6753 and 6808 levels represents the initial resistance to contend with.


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