FTSE 100 Is Reaching A Turning Point

By: Richard_Cox

Recent rallies in the FTSE 100 have been nothing short of impressive ISHARES FTSE 100 UCITS ETF (LON:ISF).  These are moves that have been inspired by low inflation levels, strong consumer spending, and better than expected corporate earnings in the region’s largest companies.  This is the type of fundamental backdrop that supports the prospects for continued rallies.  But when we look at price levels in their current form, there is some reason for caution in the near term.  

This is important for two different reasons.  Specifically, it means that it is dangerous for newer investors to start buying into the rally at its current levels.  This also means that it might be a good idea for investors that are currently long these markets to consider taking profits (at least partially). 

To be sure, the fundamental backdrop continues to hold a positive tone.  This is true in large part because there is still little indication that consumer inflation levels are likely to pick up any time in the near future.  This ultimately gives the Bank of England the room and flexibility it needs to keep interest rates supportive and to avoid acting on monetary policy changes.  As long as this is the case, we should continue to see higher valuations in equities and sustainable rallies in the FTSE 100.  But even with all of this in mind, there are still some added factors that should be considered near-term.  Let’s consider the daily chart below in the FTSE 100 stock index:

Chart Source:  CornerTrader

In the chart above, we can see that UK equities have reached their highest levels of the year and while the broader trend is still possible we are now coming into some critical resistance levels that could prove to be difficult to overcome in the near term.  At the same time, as we seeing some troublesome readings in the MACD indicator that is found on both the daily and weekly charts.  This ultimately suggests that momentum is ready to turn negative even as we are making new highs.  For those familiar with technical analysis techniques, this is a scenario that is known as a bearish divergence and in most case it encourages a round of profit taking in the broader market.

For all of these reasons, it makes sense to start reconsidering activity in the FTSE 100 -- at least in the near term.  The market is now right for those with long positions to capitalize in the unrealized gains that have already been accumulated.  When we consider all of these factors, it starts to look much more likely that the FTSE 100 is fast approaching a turning point and that we could end the month of May in a place lower than what is currently seen.  If this is to be the case, it is a good idea for those that are long these markets to either take profits entirely or to at least consider trimming back in exposure to UK equities.

By Richard Cox

© 2015 Richard Cox - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.