FTSE heading towards 6900 for umpteenth time… will it breakout this time?

The European stock markets have recovered strongly after the major index futures initially gapped lower overnight in response to Syriza's resounding election victory in Greece on Sunday. More significantly, the indices have not shown any further negative reaction to news that the left-wing party has joined hands with the right-wing Greek Independents to form an anti-austerity governing coalition. The reaction of the markets therefore suggest that a victory for Syrzia was already priced in, although the fact that it secured an impressive 149 seats, which was just two short of an absolute majority, took everyone by surprise – hence the initial gap lower. Nevertheless, the market is being kind this around and appears to be giving the new Greek government the benefit of the doubt that it may be able to find an agreement with the troika for the country to be still be in the Eurozone but with a lot less severe bailout terms. This may well be the best outcome the Greeks could have hoped for in these circumstances. However, the troika itself might not be as kind to Greece this time around and so the possibility of the country exiting the Eurozone is still there, which could come back to haunt the market in the near future.

Greek news aside, the fundamentals are still supportive for the global stock markets thanks mainly to record low interest rates across the major developed economies. And with the ECB’s action last week still fresh in the minds of investors, there could yet be a lot more gains to come for the European stocks markets in particular – that is if similar central bank actions are anything to go by (i.e. the QE programmes by the Fed and BoJ have led to significant gains in the US and Japanese stock markets). But here in the UK, the FTSE is lagging behind once again after consistently outperforming its European peers in the lead up to the ECB press conference last week. However it is important to remember that the FTSE is dominated by miners and energy stocks and with commodity prices continuing to weaken today, the index’s performance should not come as a major surprise. Nevertheless, the FTSE should be able to benefit from the positive tone seen across the European markets of late. Meanwhile on a micro front, IAG is bucking the trend with a gain of 3.5% after Aer Lingus confirmed it is considering a sweetened takeover bid offer from its bigger rival. UK drugmaker Shire is also bucking the trend on news US regulators have awarded it Fast Track status for a treatment the company is developing for Hunter Syndrome.

Technical outlook

Following the recent recovery, the FTSE is approaching THAT 6900 hurdle again. Over the past two years, this level has acted as major resistance. The most recent test of 6900 was back in September when the Scots voted to stay in the UK. Yet despite that piece of good news, traders decided not to increase their bullish bets to help push it through 6900 and towards 7000 and beyond. This caused the FTSE to retreat more than 800 points, before bouncing back from a low of 6070 in mid-October. The FTSE has since been in a consolidation, though inside this consolidative phase it has created a couple of higher lows with the first being around 6125, made in December, and the second at 6295, hit earlier this month. More significantly, the index has also managed to hold its own above the key 6000-6130 support region, which was a major resistance area in the past (see the weekly chart). Thus the long-term bullish trend has been maintained even though the index has moved mostly sideways for the best part of the past two years. Consequently, some of the long-term momentum indicators are now showing bullish signs: the weekly RSI for one has broken above its bullish trend while the MACD has created a bullish crossover and is back above the key zero level.

So, the FTSE may be gearing up for a potential breakout. If it does go on to climb and hold above 6900 soon, as the aforementioned technical indicators suggests it might, then this would be a major technical development in the long term which could see the index rally to fresh all-time highs and towards the Fibonacci extension levels shown on the two charts below. All that said however, there’s still a good chance the FTSE may once again fail at 6900 for after all, the daily RSI is approaching the overbought threshold (of >70) which points to at least a short-term pullback. In the near-term, traders should watch support at 6750/75 closely. Only a closing break below this range would signal the end of the short-term bullish trend. But even then, the potential pullback could be limited to the next support area around 6655/75 (old resistance & 200-day moving average).