FTSE falls 3.125% in two days

Price at time of writing – 6654

The FTSE's long overdue correction arrived with full force last week, taking the index down 3.125% in just two days.

Although the FTSE's fall goes some way to providing the lower-risk entry point I have been seeking, the intraday low of 6640 was not sufficiently deep to trigger my preferred option to buy on a fall to 6556. As a result, the risk remains on the high side and my short-term recommendation continues as neutral.

In my view, outgoing governor of the Bank of England (BoE) Sir Mervyn King will not be remembered as one of the best. Although the BoE has responded well to the global financial crisis over the past couple of years, it took too long for it to realise the onset of the crisis in late 2007. While the US were busy slashing interest rates and preparing to fight the gravity of the situation, Sir Mervyn was cautiously trimming UK rates, mindful of historic inflationary battles at a time that the world was being engulfed (and still is) by deflationary forces. It was not until November 2008 that the BoE finally did what most other central banks had already done, and slashed the UK base rate. This monetary policy stance may well have exacerbated the UK’s banking crisis.

The UK can now look forward to incoming governor, Canadian Mark Carney. The fact that the Treasurer has chosen a younger incumbent for this crucial post is refreshing. Mr Carney has already suggested that the mandate of the BoE should be expanded from simply targeting inflation, and that  nurturing economic growth and employment should be at least an equal priority.

Last week's correction is unusual in that it occurred from a level free of any Gann-theory resistance. The FTSE now appears entrenched within the parameters of a likely trading range defined as 6556-6922. Until we move closer to these parameters, I remain on the sidelines.

Recommendation: Neutral. Buy the index on any fall to 6556. The target remains 6922.

FTSE 100 chart

 

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