Ftse: resilience and optimism
01 October 2010
The Technical Trader’s view:
WEEKLY CHART
The market has been driven up from the lows by a completed Head and Shoulders Reversal pattern.
The minimum target move ( to 5644) was achieved - and then the market fell back.
But only to find support at the 38.2% retracement around 4900.
Look closer at the bounce from that level.
But note too, the importance of the current market level – it is a potential additional Neckline of a bull Head and Shoulders pattern. If overcome (the neckline level is 5662) the market will receive a large additional stimulus…
DAILY CHART
The day chart is interesting.
Note the tight consolidation of the past few weeks.
And the support from the rising diagonal from Prior Highs.
Attempts by the bears to break that diagonal support have –so far- repeatedly failed.
It’s tempting to look for a structure within the congestion – but there isn’t one.
Yet, on balance, we favour a test of the possible Neckline and the Prior High at 5720.
We are short-term bulls. And if 5720 can be taken out, another medium-term bull leg is in prospect.
The Macro Trader’s view:
Impending spending cuts and VAT increases scheduled for the start of 2011 may at best depress growth for a couple of quarters and at worst risk a double dip recession. Despite this the FTSE is only around 200 points off its 2010 highs.
Not a bad recovery from the lows hit in early July when the market gave up almost 1000 points on a range of anxieties.
The main factors weighing on the market then were:
- The weakening US economic recovery, and
- The Euro zone Sovereign debt crisis.
In truth, neither has been dealt with.
The US economy continues to show signs of weakening causing policy makers and administration officials alike to lose sleep. They ponder how best to re-invigorate the economy.
As for the Euro zone debt crisis, all seemed calm during the summer. But now there are renewed fears about Ireland as the Anglo Irish Bank is in need of rescue. The sum involved is put at one year of Ireland’s tax revenue - an expensive bail out. But the cost of failure would be much greater.
So why then are stocks looking so bullish and in particular the FTSE?
As ever, markets and economies are closely linked. In the US the Fed has let it be known that it stands ready to buy Treasuries if the recovery weakens any further in QE2.
In the UK, the Bank of England’s recent MPC minutes have alluded to a similar course. Policy makers are moving towards a position where they might need to re-activate their own QE program as they now judge downside risks to growth greater than upside risks to inflation due to the impending fiscal tightening.
While one could easily take the view that the economies of the US and UK are in bad shape if both Central Banks need to restart the printing presses, the equity markets take the news positively, since a fresh injection of Central Bank reserves should help spur economic growth.
Moreover there is always the possibility that here in the UK the Bank might opt to skip buying gilts and buy corporate bonds instead, in an effort to get the cash out to main street, thereby by passing the Banks that politicians still accuse of hording cash.
In any event, it is the promise that the US and UK could reactivate their QE programs that is largely behind the current bullishness of stocks including the FTSE.
Mark Sturdy
John Lewis
Seven Days Ahead
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