FTSE: time to join the stock market sell-off?

Although European markets are heavily in the red today and for the week, the FTSE has managed to hold its own relatively well. It hit a fresh record high on Thursday before pulling back slightly. In contrast, the mainland European stocks have sold off with the DAX for example easing over 500 points from its record level. This is in part due to growing concerns over the future of Greece where bond yields have jumped ahead of another key finance ministers’ meeting next Friday. If the Greek government fails to come to an agreement with the IMF then that could put the country in a technical default, which would undoubtedly rattle the markets. In addition to Greek worries, the EUR/USD currency pair, which has been correlating strongly with the European indices of late, has staged a mini rally on the back of some soft US macroeconomic data. The small bounce in the EUR/USD has eroded the attractiveness of some European export-oriented companies which probably explains why the German DAX index has under-performed the most. Nevertheless we remain fundamentally bullish on European stocks due to the ECB’s QE stimulus program and signs of an improving euro zone economy. If uncertainty over the Greek situation eases then the likes of the DAX and Spain’s IBEX could resume their upward trends soon.

As mentioned, the FTSE has done relatively well compared to its European peers. But given the uncertainty surrounding the UK elections and the Greek situation, among other risks, are the bulls being too complacent? Although it might be tempting to think that way, it is important to remember that for long periods over the past couple of years, the FTSE has been underperforming quite badly. In other words, it is merely playing catch up now. Also, it is worth remembering that the FTSE is comprised mainly of large multinational corporations and as such the outcome of the election may not have a lasting impact on the FTSE, though certain stocks or sectors could be affected nonetheless. That being said, the biggest risk for the FTSE could be if we get a hung parliament. Even if this potential outcome has no economic impact, the uncertainty that comes with it may well undermine the appetite for risk in the short term.

Meanwhile another reason why the FTSE has done well in recent days is the fact that oil prices have rallied, which has boosted this commodity-heavy index. If oil prices continue to push higher from these still-low levels then that could be further good news for the FTSE next week. But there some technical signs that suggest a correction could be on the way. As can be seen from the chart, the recent higher highs on the FTSE have not been confirmed by the momentum indicator RSI, which in fact has created a series of lower highs. This suggests that the bullish momentum is waning. If the index closes below the 7040 support level today then this could give rise to further follow-up technical selling at the start of next week. In this scenario, the index could potentially drop all the way back to the 6900 support level before making its next move. There it may also find some additional support from the 50-day moving average. The near-term trend would remain bullish until and unless it goes on to break the bullish trend line, which, if seen, could signal the start of a correction. Meanwhile on the upside, the next bullish targets are the Fibonacci extensions levels that are displayed on the chart, derived from the past three price swings.