Support Is Close At Hand For The FTSE

05/18/06 08:27:33 AM

by Arthur Hill

Some indicators suggest that support is close at hand for the FTSE and that traders should prepare for a bounce.

Security: FTSE
Position: Hold

The 6.7% decline over the last five days reversed the medium-term uptrend, but the long-term trend remains up. The FTSE advanced 1000 points (~19%) from October to May and is certainly entitled to a pullback that could erase as much as half of these gains (Figure 1). Even though the depth and speed of the five-day decline are disconcerting, the index is nearing a reversal zone that could produce an important reaction low.

FIGURE 1: FTSE 100. The index advanced 1,000 points from October 2005 to May 2006 and could be looking for a pullback that could erase as much as half of the gains.

Graphic provided by: MetaStock.

Four items point to support around the 5500-5600 level. First, the 200-day simple moving average (SMA) is at 5628, and this indicator offered long-term support in October. Second, a 50-62% retracement of the October–May advance would extend to around 5500-5600. Third, the trendline extending up from August 2004 marks support just above 5600. Fourth, broken resistance from the September–October high turns into support around 5500. All roads lead to this 5500-5600 area and I would expect a bounce, reversal, or consolidation in this area.

Even though support is near, the index remains in the falling knife category and I would wait for some sort of bullish signal before picking a bottom. The relative strength index (RSI) is oversold (below 30), but this indicator can become even more oversold. The stochastic momentum index (SMI) just moved below -50 and this indicator is also oversold. The SMI became oversold on October 12 and remained oversold until October 31. As long as SMI remains below -50, I would consider it both oversold and bearish. A move back above -50 would be the earliest bull signal for bottom-pickers.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Support Is Close At Hand For The FTSE

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