The FTSE 100 staged a big rally following the Brexit vote, driven by a combination of factors including a lower pound, a strong UK economy and rising oil prices.
Recent technical signs suggest the FTSE may have peaked and a trading correction may be starting. With a lot of news due from the UK, Europe and the US related to politics – including the US presidential election – the economy and corporate earnings, the FTSE 100 could be particularly active this week.
Since bottoming out in February, our UK 100 has been trending higher. There was a brief sell-off in June following the Brexit decision before the index exploded upward, from a large base.
Recently, signs have emerged that suggest this uptrend may be ending. The recent new high was not confirmed by a new high in the RSI, with a negative divergence suggesting upward momentum is slowing. A double top near 7100 also suggests bulls may be getting tired. The index has dropped back under 7000 toward 6925 to retest its recent breakout point. A successful test would keep the underlying uptrend intact, but a failure would signal a downturn, with the next potential support near 6855 and the 50-day average, followed by 6755.
There are a number of factors that could influence trading in the FTSE over the course of this week.
1) Trading action in GBP: since June the FTSE has been trending in the opposite direction to sterling, because many of its members are multinationals priced in many currencies and and with expectations that a weaker pound could boost the UK economy. The FTSE did not reach a new high following the GBP flash crash – a significant non-confirmation that suggests the pound could be close to a big bottom. A stabilising or recovering pound could provide a headwind to UK stocks. Chatter related to Brexit positioning and posturing could also impact GBP and the FTSE.
2) UK economic figures: this week UK inflation (Tue), employment (Wed) and retail sales (Thu) are all due which could impact speculation related to corporate earnings prospects and whether or not the Bank of England may need to bring in more stimulus.
3) Earnings season and general sentiment toward stocks: the usual seasonal sell-off in stocks really hasn't happened this year so far but there has been a slow drip downward. The FTSE could get caught up in any swings in sentiment toward global stock markets.
4) Other external factors: the US presidential debate on Wednesday night and the ECB meeting on Thursday morning may also have an impact on trading and sentiment toward world markets. Changes to risk-on or risk-off views could influence currency and index trading.
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