FTSE 100 At A Pivotal Point

Market Trends - 27/10/2016

FTSE 100 futures have retreated from session highs reached on Thursday after the British Pound rallied following data that showed more optimistic than anticipated economic results.  Advance GDP figures showed the domestic economy holding up better than expected in the immediate aftermath of the country’s vote to exit the European Union.  Third quarter GDP reportedly grew by 0.50% over the second quarter- strikingly higher than the consensus estimate of 0.30% - causing the FTSE 100 to give back earlier session gains on the back of a rally in the Pound.

Considering a large number of FTSE 100 component corporations depend on overseas revenues, share prices are sensitive to changes in exchange rates.  In this particular case, a stronger UK currency can be a net negative for their profitability. This inverse relationship often means that a rising Pound hurts equity valuations.  While the Pound jumped as high as $1.2272 after the GDP report, the currency is still down over -18.00% since the “Brexit” vote in June.

Looking at the daily candlestick chart of the price action, FTSE 100 futures are still in an intermediate term uptrend, signalled by the higher pivot highs and the higher pivot lows formed in July. Prices have been stuck in a narrow trading range since late September, with 6900 marking the floor (support) and 7060 the ceiling (resistance).  Since the index is trending near the lower end of the range, which has proven to be a strong support zone, the FTSE 100 is at a decidedly important turning point.

From an investor’s perspective the two main strategies available are to trade the range or wait for the breakout.  Traders can consider establishing positions near the bottom of the range targeting the top of the range should support hold. However, a candlestick close below the support level could imply a potential downward breakout.  This move would be confirmed by higher momentum and trading volume.  However, any further retreat in the FTSE 100 would be a function of a rising Pound.  If the GBPUSD reverses lower once more, the FTSE 100 could find itself resuming the prevailing uptrend.

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