FTSE pull-back sees it oversold

Price at time of writing – 6440.

Last week’s extended decline of 112 points triggered my recommended stop-losses, and positioned the FTSE to extend this short-term pull-back.

Further, the break below 6475 has activated my outright short recommendation. As mentioned last week, this scenario was looking increasingly likely given short recommendations had already been triggered on other global indices such as the Dow Jones, S&P 500 and German DAX. It will always be a tough ask to swim against the tide of falling markets in the US and Europe. My target of 6922, so nearly fulfilled last May when the index hit 6876, must now wait for another cycle.

The break below the support band 6491-6556 is likely to see the index extend the current correction from its recent high to one of 8.33%. The stock markets have witnessed many sharp pull-backs (and rallies) of 8.33% since the onset of the financial crisis in late 2007, and it may not be much different this time around. Indeed, a correction of this magnitude may even have the positive effect of cleaning the market of some very complacent attitudes of late. As ever, a market will only turn at a time when few people are expecting it to.

The speed of the FTSE’s pull-back has seen it become somewhat oversold, and it may first need to rally back to 6491. This would provide an ideal opportunity to sell the index more aggressively before a likely resumption of its new downtrend.

Recommendation: Stay short, or sell again on any rally back to 6491. The target becomes 6251. Stop-losses can be activated on strength above 6600.

FTSE chart

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