FTSE approaching key levels as traders look forward to ECB, NFP

The UK’s FTSE and other European indices are so far relatively stable compared to yesterday when the global markets tanked during New York hours which put considerable pressure on the S&P 500 and index futures around the globe. Sentiment is still decidedly bearish however and further falls could still be on the way. But ahead of the ECB press conference this afternoon and the US jobs data tomorrow, traders appear to be reducing some of their short positions that had been opened over the past couple of weeks or so and this is providing some support to the market. Some are hoping even that the ECB may signal its intension to embark on a full scale QE programme at some stage down the line. Others are comforted by the somewhat stronger-than-expected data we have seen of late. Yesterday saw the release of a stronger US ADP jobs report while in China the manufacturing PMI remained in the expansionary threshold. From the UK, the construction PMI, released this morning, unexpectedly climbed to an eight-month high of 64.2 in September, up from 64.0 previously. But we have also had some really disappointing data too, most notably the US ISM manufacturing PMI yesterday.

The FTSE has now fallen in excess of 375 points from the high it touched in the immediate aftermath of the Scottish independence vote. Today it momentarily broke below the August low of 6525/7 before bouncing back slightly. Thus, it has potentially paved the way for further follow-up technical selling; that or a possible false breakdown, which would be a bullish development as it would indicate the bears’ unwillingness to commit at these relatively lower levels. However the odds are stacked against the bulls in the short-term. Some of the secondary indicators bolster the bearish case: the MACD, for example, has broken below the key “0” level, while the RSI has correspondingly dropped below 40, both confirming that we are in a downward trend. However the RSI has now reached the oversold threshold of 30 and so a possible bounce could be on the cards. Still, until such a time we see a clear reversal pattern unfold in the stock markets, the path of least resistance would remain to the south. That said, some key technical levels are now approaching, so the bears should proceed with extra caution from here on.

The prior lows around the 6500 area are being tested, so there is a good chance the FTSE may bounce here, at least in the short term. Further lower is 6400 which, as well as horizontal support, also corresponds with a long-term bullish trend line that has been in place since the onset of the bull trend from early 2009 (see weekly chart in figure 2). So unless this particular trend line is broken, my long-term technical view on the FTSE remains moderately bullish. I say “moderately” because of the index’s long battle – and failure – to climb above the sturdy resistance around 6875/6900. There must be a good fundamental reason why it has failed to break through this barrier after trying for such a long time.