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    FTSE: repeated record highs on the way?

    The FTSE has relinquished its earlier gains and is trading about 0.3% in the red at the time of this writing. Despite rallying to around the previous record high of 6950 after finally breaking above the key 6900 hurdle, the buyers have so far not showed up. Investors are clearly not too impressed by the Greece-EU can-kicking, although it could also be that they are simply holding fire until there is an actual approval rather than a mere agreement for extending Greece’s bailout before jumping on the bullish bandwagon. But in the case of the FTSE, there are some actual fundamental reasons that, at least partially, help explain its weakness today. For example, shares in HSBC are down 5.5% after the bank reported a larger than expected 17% drop in profit and as details of its CEO's Swiss bank account leaked out. On top of this, shares in energy companies and miners have come under renewed pressure on the back of falling oil and commodity prices.

    Nevertheless, the overall health of the equity markets remain sound, thanks, in part, to record low and negative interest rates across many developed nations. On top of this, actual economic growth in the Eurozone could be just around the corner after several macro pointers recently surprised to the upside. And although threats of deflation may suggest otherwise, the impact of lower oil prices could start to show up in data soon.

    After finally taking out 6900 at the end of last week, the FTSE is now testing this broken resistance level as support. It is thus likely the index will bounce back from around here as it continues in its upward trajectory. If so, the next stop could be 6950 – the previous record high – followed by 7000, a psychologically-important level. Beyond those levels, the next bullish targets could be 7130/5 and then 7175. The former corresponds with the 127.2% Fibonacci extension level of the entire 2014 range, while the latter is the 161.8% extension level of the last notable downswing we saw in November (from point C to D on the daily chart).  However, if the bears manage to regain control of this key 6900 technical juncture then we could well see a notable correction as the existing buyers rush for the exits.  Specifically, the bulls may be worried if the index posts a daily close below 6900, especially if the next support at 6860 is also taken out. In that case, a pullback to 6750 may well be a possibility.

    But for now, the path of least resistance remains to the upside and so the chances are we would be talking about repeated record highs on the FTSE for the foreseeable future. After all, it has taken the bulls almost two years to push the index above this key level and now that they have achieved this goal they are unlikely to pull out all of a sudden, or at least not in a meaningful way anyway.  As can be seen on the weekly chart, some of the long-term momentum indicators are now pointing higher: the MACD for example has created a bullish crossover and is above the zero level, while the RSI is trending higher above its broken trend line. The RSI now needs to climb above the key 60 level in order to confirm the bullish breakout.

    The fact that the FTSE had effectively been in consolidation for two years meant it has massively underperformed indices which rallied to repeated all-time highs such as Germany’s DAX and the US markets. The chart in figure 3 shows that it has even underperformed the Euro Stoxx 50, meaning that it has potentially a lot of catching up to do on a percentage basis.  

    Figure 1:

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    Figure 2:

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    Figure 3:

    Source: Bloomberg: the chart has been normalised to show how the FTSE has underperformed the Euro Stoxx 50 and S&P 500.

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