There’s a whole host of fundamental factors as to why the FTSE took a tumble today — from hawkish central-bank statements to weak retail sales. As technical traders, trying to rationalize the move is to merely distract us from our job, which is to identify trade setups that have a positive expectancy.
Viewing today’s 80-point selloff, the daily candle chart shows that the FTSE formed the second shoulder in a head-and-shoulders reversal pattern, confirming a medium-term top at 7,598.
These long-winded reversal patterns make better headlines than trade setups as they always look fantastic in the rear-view mirror. Focus not on the fancy pattern but on the structure and momentum characteristics of the market. When you take this approach, three things stand out:
- Short-term momentum is bearish.
- The market has pressed down into a cluster of confluent support levels.
- The FTSE remains in a long-term uptrend.
With these three factors in mind, we can start to formulate a strategic framework that should help to reduce impulsive, ill-disciplined trades.
Dead Cats And Dip Buyers
The shift in short-term momentum is significant because it increases the importance of the next consolidation phase. A lackluster consolidation in which the FTSE coils near its lows should be seen as a ‘dead-cat bounce’ with more downside likely to follow. Under this scenario we would anticipate a selloff that is equidistant to today’s move, taking the market back down into its long-term ascending trend line. In contrast, if we start to see a series of long-tailed candles form with closes near intra-day highs, this would put us firmly back in long-term trend continuation mode.