Keep tight stops on short FTSE trades

Price at time of writing – 6606.

A positive reaction in global equity markets after the US Federal Reserve’s token tapering of its quantitative easing programme sent the FTSE 166 points upwards last week.

This placed the index just above the important band 6491– 6556. Short recommendations opened recently remain intact, however.

In last week’s update I noted the short-term oversold reading on the FTSE 100, and cautioned against the likelihood of the index re-testing my former 6491– 6556 support band. The pattern we saw last week is nothing extraordinary, and does not necessarily change my view that equity markets are transitioning to a period of weaker performance. Notwithstanding this, we should continue to apply fairly tight stop-losses on open short trades, as funds that have remained sidelined throughout the near-five-year bull market belatedly join the stock market party. Sadly, this emotive investment behaviour is an essential ingredient prior to share markets forming a significant high.

On introducing a stop-loss in today’s recommendation, I have drawn a line on the chart representing a 4.165% rise from last Monday’s intraday low. This line is positioned at 6690. Strength above this level should be used to stop short trades, after which we can await the next lower-risk opportunity.

Recommendation: stay short. Target 6251. Stop-losses can be applied on strength above 6690.

FTSE 100 chart

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