FTSE down on Tesco and as Scottish jubilations fade; key support being tested

What a volatile few days it has been for the FTSE! At end of last week, the UK index staged a relief rally as the market priced in and then reacted to news of a No vote for Scottish independence. That rally quickly came to a halt on Friday at around the key 6890/6900 resistance area, leading to an equally sharp pullback that continued into today’s session. The selling was exacerbated by the fact it has been a quiet day in terms of data releases. The only notable exception was the release of US existing home sales for the month of August. This however disappointed as it unexpectedly fell 1.8% over the month. News of Tesco didn’t help the UK market either. The struggling supermarket announced that it had overstated its half-year profit guidance by £250 million. Though the company took swift action to suspend several of its executives, including the UK managing director Chris Bush, it was not enough to help its share price with the stock closing the day down more than 11%. The trend could become clearer for the FTSE on Tuesday, as there are lots of manufacturing and services PMIs to provide direction. The Chinese manufacturing PMI comes in at 2:45 BST followed by the Eurozone data between 8 to 9am.

Technical view

The resulting price action of the last few days, including Friday when the index formed a shooting star candle, has led to the formation of a three candle reversal pattern. While this is a bearish pattern, it is important to note however that it does not necessarily suggest a complete reversal in trend; it could merely be a change or pause in direction. A key support area around 6760/70 is now being tested. This is where the 50-day SMA meets the prior lows and the 38.2% Fibonacci retracement of the upswing from the August low (i.e. the BC rally). The FTSE needs to hold above here otherwise the short-term bullish trend could come to an end. The next support level is the 200-day SMA at 6725, followed by the 61.8% Fibonacci level at 6670.

But with the US markets still near record highs and a major source of uncertainty i.e. Scottish independence fears over the UK markets now lifted, this may be the time for the FTSE to finally break through the 6900 barrier and climb towards and beyond the all-time high of 6950 that was achieved in 1999. To get there, the index will have to break above several resistance levels including 6855 and also post a daily close above 6900. Once these targets are achieved, the 6950 mark would be the first logical target, for it also corresponds with the 127.2% Fibonacci extension level of the most recent correction (i.e. from point C to D on the daily chart).

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Source: FOREX.com. Please note this product is not available to US clients.