Trade idea: FTSE 100

Following a big bounce in global stock markets, another big leg lower looks likely, with markets seemingly lining up for another selloff. As such, the FTSE 100 looks an interesting market that could fall heavily.

Financial markets
Source: Bloomberg

This week has seen the FTSE 100 rally heavily, with four strong days of gains finally coming to a halt at the crucial 6024 resistance level (November low).

It is important to note that the FTSE has been trending in a very consistent manner over the past six months, with sizeable swings in either direction during both the uptrend in August-October and the downtrend from November to present.

 

FTSE daily

These deep retracements are highlighted by the fact that each onward move tends to move back to the 76.4% retracement before moving lower. This is also the third time we have seen prices move back past the 50-day SMA, which is usually breached and subsequently sold off back below.

Thirdly, we have seen the stochastic provide us with a very good indicator of when the market is on the turn, with each successive peak above the 80 mark signifying the top of the market. The stochastic is just crossing above 80 today.

It is easy to get carried away by bullish sentiment given the upside we have seen over recent days, but we remain within a downtrend unless prices break back above 6128.

FTSE hourly

On the hourly chart, we can see that price has failed to create a new high and is attempting to break through the crucial 5946 support level. As such, I see an hourly close below 5946 as a good signal for me to go short for another big move lower next week. I would subsequently place my stops above the 6033 mark to protect myself from any further whipsaws that could happen should any bounce occur from the EU negotiations.

To the downside, I would be looking for a move back down to my first target of 5598 and second of 5497 which would provide me with risk/reward ratios of 3.5/1 and 4.5/1. However, it is possible to raise these risk/reward levels by placing my stops above the 6010 mark, which would change the R/R levels to 5/1 and 6.5/1 respectively. It depends on risk appetite.

Crude oil

There are big correlations in markets at the moment, therefore further confirmation would come, should we see a nice close below the $32.16 level in US Crude.

DJIA

At the same time we are seeing the DJIA market turn lower from an absolutely crucial double bottom neckline at 16511. We have not been this overbought in the DOW stochastics for almost three months.

Meanwhile, the MACD histogram is back at the levels last seen when the market topped off earlier this month.

Gold

We are also seeing gold starting to take off once more following yesterday’s breakout. Gold has returned as a safe haven asset, and thus this symmetrical triangle breakout was a leading indicator that perhaps people are starting to get back into the risk-off sentiment, following on from this bullish week for equities.

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