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FTSE 100 – Potential weakness ahead before new rise

18th September 2014, Thursday will be a watershed day for the European continent and United Kingdom. The Scots will go to the polls to decide whether Scotland can be an independent country. A "Yes" vote will put an end to a 307 year-old union between England and Scotland and create Europe’s newest state since the disintegration of Yugoslavia in the 1990s.
Most importantly in the near term, this historical event is likely to have a significant impact on the financial markets. In a previous survey conducted by YouGov has shown a surge in support for Scottish independence which lead to a plunge of the GBP/USD to a five-month low of 1.6060. Even the International Monetary Fund (IMF) has warned that a vote in favour of independence in Scotland could spook the financial markets.

How does this key historical event going to impact the stock market in United Kingdom (UK)? Let’s us take a look at the charts of the benchmark UK FTSE 100 Index to offer some "clues" from a technical analysis perspective.

Key elements

  • Since hitting a low close to 6000 on 23 June 2013, the FTSE 100 has been trading in a sideways environment below the 6900 horizontal resistance which is also close to its current all-time high of 6930 achieved in December 1999 (see weekly chart). 
  • This one year-long plus of sideways movement has formed an impending bullish continuation chart pattern called "Ascending Triangle" (see weekly chart).
  • The trendline support of the "Ascending Triangle" stands at 6600 which also coincides with lower boundary of the long-term ascending channel in place since 07 August 2011 and 76.4% Fibonacci retracement from 08 August 2014 low (see weekly & daily charts).
  • The upside exit potential of the "Ascending Triangle" stands at 7600 which also confluences closely with the upper boundary of the long-term ascending channel and 0.618 Fibonacci projection from 28 August 2011 low to 23 June 2013 low at 7400 (see weekly chart).
  • Price action has shown signs of "weariness" at the 6900 resistance through the formation of the "Spinning Top" and "Hanging Man" bearish candlestick patterns and the Index has recorded a daily close below the low of the "Hanging Man" at 6826 (see daily chart).
  • The Stochastic oscillator has flashed a bearish divergence signal and still has room for further downside potential towards its oversold region (see daily chart).

Key levels (1 to 3 months)

Pivot (key resistance): 6900/6930
Support: 6670/6600
Next resistance: 7400/7600

Conclusion

The longer-term picture (weekly chart) suggests that the FTSE 100 is still evolving within a bullish trend since 2011. A clear break above the 6900 resistance of the impending "Ascending Triangle" is likely to trigger a new round of potential upside movement towards the 7400/7600 zone.
However in the intermediate term (1 to 3 weeks), the Index may see a decline below the 6900/6930 pivotal resistance to test the trendline support of the "Ascending Triangle" at the 6670/6600 zone.

Charts are from City Index Advantage Trader

Disclaimer

The information contained in this material is intended for general circulation only.  It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs.  Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.  All queries regarding the contents of this material are to be directed to City Index Asia Pte Ltd. 

 

kelvin_wong
Kelvin Wong, CFTe

Chief Technical Strategist (Asia), City Index

Kelvin is professional technical analyst with extensive experience in stock indices, equities and foreign exchange. Kelvin employs a combination of fundamental and technical analysis and specialises in utilising Elliot Wave and Fibonacci analysis to pin point potential reversal levels in the financial market. Prior to joining City Index, Kelvin has traded actively and provided investment advisory for institutional traders/investors such as Deutsche Bank, Credit Suisse, ANZ and Goldman Sachs. He has also conducted technical analysis related trading workshops and seminars for thousands of private traders in Singapore and Malaysia.