FTSE 100: Trading in a channel

 
Philip Salter
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FOR weeks the FTSE 100 has been trading in a channel – proffering clues on price action for spread betters. The UK index has certainly seen its fair share of ups and downs over the years. From its 1984 base level of 1,000 it peaked at 6,950.6 on 30 December 1999. The financial crisis saw a sharp fall and the rebound was short-lived. But outside these big moves there have been easier trades.

RANGEBOUND
Following the sharp sell off at the beginning of August, the FTSE 100 has been ranging between 4,800 and 5,400, says Angus Campbell of Capital Spreads. Joshua Raymond of City Index notes that the FTSE 100 had been struggling to overcome resistance at 5,450, which was proving to be a large hurdle for UK large cap shares. IG Index’s David Jones says it was trading in a channel for about six weeks, although it did have a brief attempt, which failed, to break below in early October. According to Campbell, the index attempted on six occasions to get back above the resistance with three clear failures, one in the middle of August, one at the beginning of September and the final one in the middle of September.

CASHING IN
Spreadco’s Ian O’Sullivan says “FTSE range traders have been having a blast with the way the FTSE has moved for the past two months.” When prices move in a recognisable pattern, traders can better predict the direction and strength of swings. The longer the channel remains, the harder it is for the price to burst its banks. As such, “when markets are stuck in a trading range, it can create short-term trading opportunities with relatively low risk allowances,” explains Raymond. Jones says one way of making money has clearly been to just play the channel, by buying into weakness and selling into strength. O’Sullivan says that this trade gave about 5 short entry points and 6 longs before the final rally took it out of range. “These conditions are much easier for clients to make money as history repeats itself,” adds Campbell, although he cautions it’s when a market breaks out from a trading range that people are surprised.

Raymond says City Index saw clients buy the FTSE each time it has headed towards the 4,950 level and sell it each time it reached 5,400-5,450. Thus, when spread betters were buying the FTSE at around 4,950, they were expecting a bounce back towards the upper levels of the FTSE’s trading range, says Raymond. They were placing a stop loss below 4,850, as a break towards there could indicate a negative break out of the FTSE’s current range. For those spread betters short selling the UK index at the 5,400 level, Raymond saw stop losses set at around 5,500, as a concerted break above here would indicate a bullish break out of the range.

REMEMBER, REMEMBER
In closing at 5,466 on Friday, the channel was broken. O’Sullivan now expects 5,400 to offer strong support on the way back down. As such, he thinks “traders should look to get long on any dips to around 5,370-5,400 with stops around 5,320 in case it reverts to the lower part of the range.” Raymond thinks a consolidation above the 5,450 level could pave the way for a potential consistent break to the next upside target of 5,600.” Jones says: “Traditionally a break out of a range as we have seen in recent days would suggest a reasonably significant change in sentiment, with further gains to the upside to come.” Europe’s enduring debt crisis will clearly weigh on the FTSE going forward, with Jones warning “sentiment is still clearly vulnerable to a shock.” But he adds: “For now at least this is the most optimistic the FTSE has looked for some months.”

Campbell says we saw a similar channel earlier in the year when the market traded between 6,100 and 5,800. “Those who cannot remember the past are condemned to fulfill it,” said philosopher George Santayana. Although this particular FTSE trade has finished, similar channels will form in due course. When they do, it will be the right time to take the plunge.