Last week was a rough one for the FTSE 100 with index down over 65 points. Moreover, it would have been a lot worse had it not been for Friday’s fightback which saw the FTSE 100 rallyjust shy of 50 points.
Interestingly, we believe Friday’s price action could in fact be a sign of things to come, and here’s why.
However, December was a game changer. The FTSE 100 powered higher during the month and crucially broke and held above 7,600. Remember, breaks of well-established resistance are very powerful price action signals, and in this instance, clearly pointed to the re-emergence of the FTSE 100’s dominant uptrend.
More recently, we’ve seen the index retrace lower and despite some traders now starting to question whether this is a turning point, we still believe the longer-term outlook is bullish.
Firstly, as we all know, trends rarely move in a straight line and with the FTSE 100 holding above previous resistance at 7,600 ,the integrity of the uptrend remains in-tact. Moreover, we also know trends which undergo periods of (orderly) mean reversion are less likely to suffer from ‘trend exhaustion’.We view the FTSE 100’s recent pull-back as exactly this and closer inspection reveals the pullback to be nothing more than a two-legged, harmonic ‘ABCD’ retracement.
Finally, last Friday’s sharp reversal points to powerful buying demand just above the 7,600 mark, which in turn offers evidence of the previously broken resistance zone having turned support.