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Last week saw the FTSE 100 emphatically reject trend highs and go on to fall over 200 points.
FTSE 100 Futures
Crucially, having recognised that a 7,550 – 7,600 resistance zone was in play, our warning signs were triggered when the index broke lower from two days of coiling below 7,550. See here for a video going into further detail on exactly this.
Where will the FTSE find a foothold?
Before I carry on, I must note the index breaking back below 7,440 is key – without this we wouldn’t even entertain the notion of a longer-term pullback. However, having seen this happen earlier this week, all eyes now move to 7,300. This is because the FTSE 100 found support and bounced off 7,300 throughout all of July and August, hence, any break below this support level would signal significant selling pressure.
That being the case, a break of 7,300 wouldn’t be enough for us to call an end to the indexes powerful longer-term uptrend. This is because we have already seen the FTSE 100 break below 7,300 back in September. And, with a major support level in play at 7,200 , there would be every chance a downtrend breaking below 7,300 would subsequently stall at 7,200.
So yes, whilst the short-term backdrop remains bearish, with prices locked between major and minor resistance and support levels, we favour focusing on lower timeframe plays. Let’s not forget, some of the best lower timeframe trends occur within higher timeframe trading ranges…
Given the above, it would of course be easy to forget that the integrity of the FSTE 100’s long term remains intact. This point is reflected by the index continuing to print higher ‘unbroken’ swing-lows. Hence, whilst we maintain that the near-term outlook favours a net short tilt, traders should remain ready to move switch back long at the drop of a hat. Moreover, with several support levels below the current price, the index will be afforded plenty of chances to rebound at support in the coming sessions.
Of course, it is unlikely we will see a perfect bounce off these levels. Hence, we instead recommend using price action signals that reinforce key support levels as entry triggers to go long. One of the best signals to look for is a ‘false break’ – this occurs when the market breaches a support/resistance level, triggers stops and then snaps quickly back. A prime example of a false break can be seen on the 7th of this month – and remember, it was the false break of the 7,550 – 7,600 resistance that started the recent selloff.
