Having seen the FTSE 100 fall over 200 points from its June 2 highs, the index broke decisively lower Thursday setting the scene for this selloff to continue.
With multiple interior resistance levels still in play, just how far is the index set to fall?
Head And Shoulders
The index breaking below the ascending neckline of a well-established head-and-shoulder pattern last month is key. This reversal pattern confirms the bearish backdrop for the index and provides the foundation for any FTSE 100 short.
Of course we have to stress that FTSE remains in a longer-term uptrend. Accordingly, the potential for a sharp reversal in short-term (bearish) momentum remains very real. As such, it is critical that investors look for signs that this could be in the cards and how prices trade at key interior support levels offers exactly that.
Thursday’s Break Lower
As the above chart highlights, an interior resistance zone is in play between 7,389 and 7,373. We note that intraday highs failing to break above this level 4 times in as many days has seen this resistance level unequivocally reaffirmed this week.
With a resistance level formed overhead, the FTSE 100’s move into an aggressive compression mode last week grabbed our attention. While the index has printed a series of higher lows to form a ‘bear flag,’ this week’s battle between bulls and bears is best depicted by Tuesday’s and Wednesday’s price action. Tuesday’s range was the narrowest in 4 sessions while Wednesday’s was the narrowest in 7 sessions as the combined 2-day range was the narrowest in 20.
What's Next?
Given Thursday’s bearish break lower, the probability favors the index going into a break below the next interior support level. Although prices have (so far) failed to do so and, in fact, bounced off this level intraday, our short-term outlook remains bearish. Hence, we highlight the subsequent support levels below this. Of course, prices rarely move in a straight line and we caveat these levels by stating that key pivot levels can (and do) change as prices evolve over time.
Be that as it may, we are paying close attention to these interior levels. And with each break of a level comes further evidence that the FTSE 100’s recent selloff is, in fact, the beginning of a longer-term downtrend.