Technical Analysis GB100 : 2016-07-22

UK stocks recovered from Brexit

FTSE 100 has risen to 11-month high recovering from Brexit loss. The Bank of England refrained from cutting the interest rate at its July 13 policy meeting and kept the annual asset purchases at £375 billion. It said economic activity is likely to weaken in the near term and policy makers expect the monetary policy to be loosened in August. Easier monetary policy will provide support for UK stocks. At the same time Manufacturing and Service PMIs are expected to come out weaker for July, reflecting the negative impact of Brexit. Will the FTSE 100 index continue rising?

UK stocks recovered in the past four weeks from the steep decline after the British vote to leave the European Union on June 23. The decision to leave the EU increased business and political uncertainties for the British economy until new agreements are reached with EU members. Credit rating agencies downgraded the UK’s AAA credit rating shortly after the vote and UK’s credit outlook was revised down by Moody’s and Fitch Ratings to negative on concerns the separation from the EU will have damaging implications for the country’s medium-term growth outlook.

However the depreciation of the Pound was beneficial for the UK stocks as FTSE 100 rose 16.81% since the sharp decline of June 24, rebounding from the Brexit loss and reaching the levels last recorded in August 2015. The unemployment dipped to 4.9% from 5% in the three months to May, the lowest since 2005. The growth in weekly wages, excluding bonuses, slipped to 2.2% from 2.3% recorded in the previous three months. However the labor market data do not reflect condition changes after the referendum. Retail sales declined 0.9% on month in June which can be attributed to lower consumer confidence due to growing uncertainty before the referendum, and the 3.9% growth on year was lower than expected after a 5.2% rise in May.

Manufacturing and Services PMIs for July are due to come out weaker today indicating a negative impact of the Brexit. The manufacturing and service sectors are expected to contract in July, and continued negative trends in manufacturing and services sectors together with lower consumer spending will then result in slowing growth or even recession, which will be bearish for the UK stock market. The second quarter GDP report will be released next Wednesday on July 27, with Gfk consumer confidence survey results due early on July 28.

FTSE 100

On the daily chart FTSE 100: D1 has been climbing since the sharp decline after the Brexit, recovering from the post-Brexit loss and reaching record high for 2016. The price has risen above the 50-day and 200-day moving averages MA(50) and MA(200). The Donchian channel is flat indicating no clear trend. The Parabolic indicator gives a buy signal. The MACD indicator is above the signal line which is above the zero level and rising, with the gap narrowing. This is a bearish signal. The RSI oscillator has reached the oversold zone. We believe the rise above the last fractal high and upper Donchian bound at 6743.58 will signify continuation of bullish momentum. This level may serve as a point of entry. The stop loss can be placed below the last fractal low at 6611.51. After placing the pending order the stop loss is to be moved every day to the next fractal low, following Parabolic signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. The most risk-averse traders may switch to the 4-hour chart after the trade and place there a stop-loss moving it in the direction of the trade. If the price meets the stop-loss level (6611.51) without reaching the order (6743.58) we recommend cancelling the position: the market sustains internal changes which were not taken into account.

Position Buy
Buy stop above 6743.58
Stop loss below 6611.51