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$FTSE Undergoing Tricky Rally

02/28/12 12:38:11 PM
by Chaitali Mohile

The bullish path of the London Financial Times is highly volatile. Will the index continue this journey?

Security:   $FTSE
Position:   N/A

An ascending rally of the London Financial Times Index ($FTSE) has surged to 5900 levels from 5328 levels. Although the series of higher highs and lows is a bullish indication, $FTSE is narrating a different story. The series of higher highs and lows of the index in Figure 1 is moving in a narrow range, forming a rising wedge pattern. The pattern matures when the two converging trendlines meet at a single point or if the price breaches the lower trendline support. Therefore, the rising wedge in Figure 1 would narrow further, trapping the price movement.

$FTSE is likely to move within the two converging trendlines for the next few trading sessions. The rising wedge breakout occurs in a bearish direction, gearing up a fresh downside rally. Therefore, the index is likely to come under bearish pressure after the breakout.

FIGURE 1: $FTSE, DAILY. The index is forming the rising wedge -- a bearish reversal formation on the daily time frame chart.
Graphic provided by:
This bearish reversal formation would not be good news for traders. The full stochastic has been overbought for a long time and, therefore, may result in a bearish move. The average directional index (ADX) (14) is shaky in its developing uptrend region. The buying pressure indicated by the positive directional index (+DI) is unable to sustain above 30 levels, resulting in an unstable uptrend. The moving average convergence/divergence (MACD) (12,26,9) is showing high volatility during the bullish rally. Therefore, $FTSE is likely to witness shaky price movement within the rising wedge till it finally breaks downward. However, the potential bearish breakout has two strong supports of the 50-day and 200-day moving average (MA), so the index could have limited downside.

The Fibonacci retracement levels on the monthly time frame chart in Figure 2 shows that the index has surged above the 61.8% retracement level. $FTSE has already moved in the bullish zone of the chart so a marginal dip in the price levels would not harm the bullish sentiments. The stochastic oscillator is climbing with the support of the 50 levels, indicating bullish momentum in the rally. The MACD (12,26,9) is likely to undergo a bullish crossover in positive territory in Figure 2.

However, the weak trend would discourage the speeding price action. In addition, the index is just a hundred points away from its previous high. To breach this previous high resistance, the index has to gather robust bullish strength and develop a strong uptrend.

FIGURE 2: $FTSE, MONTHLY. The weak trend indicated by the ADX (14) would slow down the upward rally.
Graphic provided by:
Considering the three indicators, $FTSE is likely to descend a few points from the prior top resistance. The declining rally could be the breakout point of the rising wedge in Figure 1. Thus, the bearish breakout rally is unavoidable for $FTSE in the near future. Since $FTSE has immediate supports on both Figures 1 and 2, the index would not plunge harder. Later, $FTSE would resume its bullish path.

To conclude, the potential bearish rally of $FTSE has limited downside.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
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