Where now for the FTSE 100?
As the FTSE 100 hovers below resistance, we look at the current state of the index and where it might go from here.
FTSE 100 has staged a remarkable recovery, but the question is now whether it is just a brief renaissance or if there is further to go.
What does the chart say?
From a chart perspective, we can see that the weekly chart is at a crucial point. The rebound has brought the index back to 6530, where it stalled in June. This was a vital area in February, when the weekly close below this sparked the drop to 4800, and also back in late 2016 and 2018, when significant bounces started from this level.
A weekly close above 6530 would be a positive development, and clear the last hurdle before a move back towards 7800 and the area of resistance that has held since the end of 2017. A new drop could suggest that a move back towards the October low at 5500 is developing, but as the daily chart shows the index is probably overextended in the short term, and so a modest pullback could develop in the coming weeks.
When is Santa coming?
The index faces a similar conundrum as others, since while December is usually a strong month (and matched by an equally-weak January!), this year saw huge gains in November. Have all the final month’s gains been brought forward, or are we due more gains as the ‘Father Christmas rally’ (since it is the UK) gets underway?
From bad breadth to strong breadth
Short-term breadth was very stretched in early November, when over 85% of the index was above its 20-day moving average (MA), the highest reading since June. Such strong readings are more characteristic of uptrends, and while breadth dropped back towards the mean, it did not drop below 50%, which should be viewed as a positive sign.
The weakness of the index over the summer was clearly demonstrated by the fact that less than half the index was above their 200-day MA at market peaks. Bull markets need that reading to hold above 50%. Now the reading is 78%, so the market looks stronger, but the real test will be when a pullback arrives. If the reading can hold above 50% then the longer-term view becomes more bullish, and should support the breakout on the weekly chart outlined above.
Client sentiment – from dip buying to selling rallies
Turning to client sentiment, we can see that clients have been much less enthusiastic in being long now that the index has rallied hard. Previously the dips saw big increases in long positions, but we have gone from being around 80% net long to just 50%. Still clients bought the dip in late November, with the sentiment reading moving to 65% net long.
Arguably, the greater scepticism about this rally makes it more likely that it will last, since indices such as the Dow and S&P 500 that have seen much stronger gains have been accompanied by client sentiment readings around 50% net long, as the FTSE 100 is seeing now.
Still a long way to go
The index is still massively behind the global benchmark of the S&P 500, or indeed the MSCI World index too. This leaves traders with the problem of buying an index that is finally showing signs of life, but that has seen limited growth in the past five years, or joining in with an index that has been the much stronger performer.
In bull markets the rule is generally to buy the stronger performer, in the expectation that momentum will continue to drive outperformance. It is true that the FTSE 100 has begun to recover, and a resumption of the move from value to growth could well see some of the gap closed, but it is usually much easier to hop on an established trend than to try and call the turn in any market.
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