LONDON might no longer hold the prestigious title of the world’s leading financial centre – it only managed to tie with New York in a report by the City of London Corporation that was released on Friday – but Britain's FTSE 100 is leading the markets’ march higher. Traders might have been cheering Wall Street’s 17-month high at the end of last week, but just days earlier the FTSE had closed at 5,640.27, its highest level for 21 months. It is just over a year ago that it hit its low of 3,625.83.
But although the blue-chip index did manage this new high on Wednesday it traded sideways for much of last week, with little market data or news to push it decisively one way or the other. This bout of consolidation can be seen in two different lights: either the index is getting a bit toppy and some correction could be due shortly, or it could simply be pausing for breath before another leg higher.
City Index’s clients, at least, are certainly betting on the former. Throughout last week the spread bet provider reported that traders were building up their short positions in the index, signalling that they expect some consolidation at these levels. After all, the index has managed to rise 600 points in the last six weeks. However, they are keeping their stops relatively close, which indicates that they would quickly reverse their positions if indices do manage to push higher from here.
So what is actually going to make the FTSE 100 break out of its current range? Not a lot, it would seem. Earnings season is practically over, with the exception of security services group G4S on Tuesday and new entrant Investec, a South African investment bank, reporting first-half results on Thursday. And apart from unemployment data on Wednesday, there is little UK macroeconomic news scheduled that could really shake up the index. In the run up to Easter there are few events to make investors think about pushing on and opening up higher positions ahead of two short trading weeks.
However, this Friday is triple witching day – a quarterly event which occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. This can create more than a little volatility in the markets as institutional investors rejig portfolios. Short-term traders such as spread betters can therefore look to profit from the extra volatility that is likely to occur at the end of the week and the bulls can hope that the sharp moves will give the index an extra boost back up towards the 21-month high of 5,640 and beyond.
Capital Spreads’ head of sales Angus Campbell says that on the upside, the next technical resistance level would be in the 5,675 to 5,700 area, which was where the index failed to break above just before Lehman Brothers failed in autumn 2008. If the FTSE does manage to reach as high as this, then we could see some selling and several tests of this level. However, the more times an index tests a resistance level, the better the chance that the break higher, when it comes, will be a sustainable one.
Alternatively, the FTSE 100 might take a dip in the coming weeks. The stricter stress tests for banks, the Budget and continued political uncertainty are unlikely to be positive for the index, even if the FTSE’s components do derive some 70 per cent of their earnings from overseas. The immediate level that traders should be watching out for in the near-term is the old resistance level of 5,600. If you are a cautious bull and want to be in the market, then keep your stops close at just below this level.
However, the speed of the index’s rise over the past month means that any break below 5,600 could spell a significant setback for the FTSE. Capital Spreads’ Campbell says that the market had struggled to get above 5,400 previously so this would be the where the next big test could come.
Spread betters should be looking ahead with excitement to the volatility on Friday from triple witching. But with the market so finely balanced, keeping those stops close will ensure your trading isn’t cursed.