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FTSE: Thursday unlikely to be super for UK stocks

Super Thursday is here. Today the Bank of England will announce its interest rate ‘decision’, release the minutes of last week’s meeting and publish the quarterly Inflation Report.  Super it might be for the pound, but it probably won’t be for the FTSE. In fact, the UK index is down about 0.3% at the time of this writing and is slightly underperforming European stocks. Judging by the reaction of the pound in recent times, the market is probably expecting to hear some hawkish remarks from the BoE. Although the Bank’s upbeat remarks may boost confidence about the UK economy, the prospects of slightly less accommodative monetary policy stance my not be so good for the UK stock market overall. But the bigger concern for the FTSE is the going turmoil in the commodity markets with both crude and metal prices continuing to slide almost on a daily basis. Though some mining and energy names did manage to find some buying interest yesterday, they have now turned back lower and dominate the bottom half of the commodity-heavy FTSE index. Gold has fallen and is on the verge of another breakdown as the dollar continues to strengthen while crude oil prices remain near their yearly lows due to concerns about the still-growing global supply glut.

The FTSE has made a decent recovery since hitting a low of 6412 in early July. Sentiment has been boosted after the Greek crisis slowly defused and as corporate earnings impressed on both sides of the pond.  From a technical point of view, the UK index managed to hold its own above a bullish trend line and the most recent bear assault ended around 6500 in late July. Consequently, the index has formed a higher low, which is bullish. However a higher high is now needed above the previous high of 6810/5 in order to confirm the change in the trend. Until and unless we see that, the near term outlook would remain murky. Indeed, there is even the possibility that the FTSE will head lower from these levels now that the 200-day moving average is being tested as resistance at just above 6765. Interestingly, there is also a short-term trend line converging around the 200-day average, making 6750 an important resistance level.

If and when the index posts a daily closing break above 6765 then the probability that it will also break above the next resistance at 6810 would increase. Beyond 6810, the next bullish target would be the 61.8% Fibonacci retracement level of the downswing from the record high of 7126/7 hit in April. Meanwhile the key support levels to watch are at 6635 and then 6500; the latter also corresponds with the bullish trend line. If and when this level breaks down, we could see a significant move to the downside.

Figure 1:

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