Q. Dear Sandy, how could I have traded the decline in last week’s FTSE 100?
A. In the previous article we discussed the use of pivots. If you were observing the FTSE 100 index you should have noticed three key points. On the chart (right) you will notice that firstly the index had been struggling to break above the 5,400 level for 10 days. Then on 6 August a pivot low had been created at 5,309. As the index attempted to climb above 5,400, it failed three days later and broke below 5,309, initiating a short position. One could have placed a sell order at this level rather than just watching a screen. Once the order had been triggered, we would wait for the market to tell us what to do next. On 12 August another pivot low formed at 5,210 followed by a pivot high at 5,351 on 17 August. If the market successfully pushes above 5,351 then this would reinforce a short-term bullish pattern, however, if it fails to do so and remains at 5,210 then this would be a bearish signal.
Q. Dear Sandy, what should I look out for this week?
A. The markets are always in a state of imbalance. This means that there is a tug-of-war going on between the bulls who want to take the market up and the bears who want to drive the market lower. So what we can do is look for something called price rejection levels. Basically, this is the same as support and resistance. So we know by looking at the chart, the previous key price rejection point was 5,090 that was reached on 20 July. At this point the bulls lifted the market higher. I think that the bears out there are going to try and test this level so straight away we can look at this price level as a potential target price for support. Of course, the bears will want to try and take it below this level and the bulls will want to try to reject their view by trying to lift the market higher again at or near this price level. But at least we can have a potential price objective if the FTSE declines further this week.
Q. Dear Sandy, so should we assume the market is now bearish and is therefore weak?
A. Given the current position, with the FTSE unable to make a successful break above 5,400 and also the fact that 5,210 has been broken creating a lower high and a lower low, we can assume that the immediate trend is bearish. Also, the size of the price bars on the recent down moves have been quite strong. This is significant since it is an indication that selling pressure is rising. Moreover, history tells us that markets can fall faster and sharper than they rise. A contributing factor to this is the psychology of fear.
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