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FTSE on the verge of a major breakout

The FTSE has jumped in excess of 1 per cent today, extending the gains made in electronic trading late yesterday when Wall Street rallied into the close. A triple whammy of good news has helped to lift the investor sentiment today. First, it is news concerning Greece where the new anti-austerity government appears to have dropped calls to write-off its debt, proposing instead to swap it for growth-linked bonds. This apparent U-turn is a remarkable change of tone from the government's vows last week to end austerity imposed under its existing bailout. If Greece manages to reach a compromise with the troika then a major source of uncertainty will be lifted from the markets, which could help to boost the appetite for risk even more. Secondly, oil prices have rebounded strongly over the past three trading sessions on signs that producers are cutting back output as demand for leasing oil rigs slowed down sharply last week, unambiguously due to the significantly weaker crude prices.  The bounce in oil has boosted shares in the commodity sector and this theme could continue for some time yet.  The third piece of good news is earnings from oil giant BP. Despite taking a $3.6 billion impairment charge due to oil price collapse, its numbers still managed to beat expectations. However not all oil companies beat expectations as BG Group found out, which wrote down the value of its business quite substantially and also slashed its investment budget for this year by around 30 per cent. Nevertheless, more stocks are rising than falling today and not just in the commodities sector. The reporting flurry will continue tomorrow as Sky, GSK and Hargreaves Lansdowne publish their figures. Then on Friday, we will have figures from the Smith & Nephew and AstraZeneca.  In addition, there will be lots of earnings numbers from the US and European companies, and also plenty of macroeconomic data, to look forward this week. Meanwhile in terms of the longer term outlook, the FTSE may find support from central banks’ on-going “race to the bottom” in interest and exchange rates. Although the Bank of England is unlikely to loosen policy further, the recent actions of the European Central Bank may be enough to keep the European bull market intact for the foreseeable future.

The stock market rally has helped to keep the FTSE above the key 6750 support, a level which was formerly resistance. However, despite the rally the index is still technically in long-term consolidation mode as it hovers just below the 6900 barrier. It has held below this key figure for a good 2.5 years now. Thus another pullback from here would not surprise us, at all. But from the longer-term charts, traders may be able to observe that inside this consolidative phase the FTSE has created a couple of higher lows, which may be sign of things to come. Significantly, the index has also managed to hold its own above the key 6000-6130 support region, which was a major resistance area in the past. Consequently, some of the long-term momentum indicators are now showing bullish signs: the weekly RSI for one has broken above its bullish trend while the MACD has created a bullish crossover and is back above the key zero level. In other words, the FTSE may be gearing up for a potential breakout. If it does go on to climb and hold above 6900 soon, as the aforementioned technical indicators suggests it might, then this would be a major technical development in the long term which could see the index rally to fresh all-time highs and towards the Fibonacci extension levels shown on the two charts, below. All that said however, there’s still a good chance the FTSE may once again falter at 6900. So, it is important to watch support around 6750 closely. Only a decisive break below this range would signal the end of the short-term bullish trend. But even then, the potential pullback could be limited to the next support area around 6655/75 (old resistance & 200-day moving average). But as things stand, the FTSE looks like it wants to push higher and join the DAX & co in hitting fresh all-time highs.

Figure 1:

Source: FOREX.com. Please note this product is not available to US clients

 

Figure 2:

Source: FOREX.com. Please note this product is not available to US clients


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