Q. Dear Sandy, what is technical analysis and can it help me in the current market environment?
A. Firstly, technical analysis is not about predicting what the market is going to do next. Instead, it is more about looking at past price movements and patterns to help one make a forecast on what may happen to the market going forward.
Although technical analysis has been around for many years, the advent of computer technology has made it easier for today’s technician to analyse charts and find re-occurring patterns using specialised software.
Basic software packages can also provide a trader with ample information on the behaviour of current price movement.
But what one should be looking at on a chart is where the markets have recently found support or resistance and also if the market is trending towards the upside or to the downside. This information should be able to provide a trader with some basic guidelines as to how the markets are currently behaving.
Many newcomers to the financial markets are faced with the question of whether or not they should use technical analysis to help them make informed trading decisions. Markets such as the FTSE 100, gold and oil have provided decent moves over the last few weeks. But the question on where to enter and exit a market can be a difficult one, even for the most experienced traders.
However, using technical analysis can provide you with a visual reference point on the market. If you obtain key price levels from charts, then you will not have to pore over fundamental data for hours on end or resort to just plain guessing where the market will head next.
This can help you make decisions quickly – an important factor when the markets are so fast-moving.
Q. Dear Sandy, is the FTSE 100 index bullish or bearish at the moment from a technical perspective?
A. Since its 16 April high of 5,833, the FTSE 100 has fallen sharply. It lost 16 per cent to reach a low of 4,898 on 25 May. Since then, the index has traded towards the upside and recovered some ground. It has climbed back above the psychological level of 5,000. Currently, the index has broken above a recent resistance level of 5,260 and appears to be heading higher, calling for a bullish move. If the index can stay above 5,260, then there is a possibility that it may be able to reach the 5,366-5,435 level, which is where the FTSE 100 has weakened from before. With this in mind, we could say that these areas can be considered to be a price resistance point. If the index can reach these levels then that could create a decision point for traders. But if we see the FTSE fall below its recent short-term support of 5,150, then it is possible that the bears may try to take the index all the way back down towards 4,983.