Q. Dear Sandy, the FTSE 100 seems to be struggling. Will the index fall this week?
A. Over the past two weeks the FTSE 100 has struggled to break above the resistance level of 5,610. This is suggesting that the index may be weak. When we see a market reach a certain price level and then hesitate – this is often referred to as consolidation – then one of three events can occur. First, the market may continue to consolidate at or around that price level. Second, it may carry on in the direction it was moving prior to the consolidation. Or third, the price movement can reverse.
The FTSE 100 had been rallying prior to the consolidation so, technically speaking, the index may be pausing for breath before it continues higher to the next price target at 5,700.
So this week we have to watch out for the recent high of 5,635, which, if cleared, would suggest higher prices. If we instead see prices trade lower then a top may be in and the bears are likely to take the market lower.
Q. Dear Sandy, what key points should I look for if the market is to fall?
A. By looking at the FTSE 100 daily chart (see right) we can see clearly that we have a sideways trend at the moment. Previously, when the index made a high at 5,418 we had a similar pattern of consolidation for 11 days and then a short-term decline took the index lower.
Patterns often repeat themselves in the market and we may see a repetition of a similar event again. This is not a guarantee but rather an observation.
Recently the FTSE found support at 5,530 and 5,508. If the index trades below this price level this week then we can be more bearish for the immediate term. On this basis we would expect lower prices and would therefore short the market.
Q. Dear Sandy, does a falling FTSE 100 mean that the price of gold will rally?
A. Sometimes we can find inverse relationships existing between certain markets. For example, if the FTSE 100 declines then some investors may look towards gold, which provides them with a safe haven during bearish market moves. This would certainly help lift the price of gold higher.
But there are also speculators who like to ride current trends. At the moment, the trend for gold is bullish and therefore this may also help to lift gold higher.
Until we see prices decline sharply followed by lower highs and lower lows, the view is that gold could well stretch beyond the all important $1,300 level.
Learn more about technical analysis with Sandy at his free City Index seminars.