Where Next for the FTSE 100?

Investor sentiment and equity markets have tumbled as of late. The risk-off move and subsequent shift to defensives as well as safe haven currencies has resulted in the FTSE 100 falling over 100 points from Wednesday’s highs and US stocks recording their first 1% daily decline in 109 sessions.

Although no precise catalyst for this shift in market sentiment can be pin pointed, we can say with clarity that beneficiaries of the ‘Trump Trade’ have been hit particularly hard. Growing fears that Trump will fail to repeal Obamacare translating into investors believing this will threaten the rest of his legislative agenda is the driver behind this.

Of course, the question everyone’s asking is ‘where next for the FTSE?’ So let’s address this.

FTSE 100 hits support

Firstly, following the FTSE 100’s recent selloff the index is now trading just above a key support level at 7,300. The support zone is formed by the mid-February swing high and the March 9th hammer candle close (labelled S1). Focusing on yesterday’s price action, we note that the FTSE 100 touching and rebounding off this support zone further re-enforces the significance of this key level.

Moreover, this horizontal zone coincides with an emerging trend line. Confluent support from a key horizontal level and trend line should not be dismissed lightly and hence we wouldn’t be surprised to see the index move higher from here. Lest we forget, the index remains locked in a stellar longer term uptrend.

If support breaks…

Bears will counter by pointing to the pace of the recent sell-off. With the index currently trading below its January 17th, March 2nd and March 17th swing-highs and the index over 100 points off its most recent highs, they have a point.

Putting our ‘bear hat on’, we note that any break and hold below yesterday’s lows, not exactly far away, could in turn pave the way for this retracement to roll on. In this scenario we would have a clear change in market structure and as such we would expect the index to leg lower to the next support level found at the March 9th lows (S2). Any break below this would mean the February 24th lows (S3) would be in sight. Here we note that neither of these support levels are well-established!

As such, I hope you can see that price action in the coming sessions will be key in determining whether this retracement will roll on, or if the FTSE 100’s stellar run will kick back into gear.