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FTSE 100 Forecast: Gap Fill Leads to Quick Reversal, Is There Conviction?

FTSE 100 Forecast: Gap Fill Leads to Quick Reversal, Is There Conviction?

Peter Hanks, Strategist

FTSE 100 Price Outlook:

FTSE 100 Forecast: Gap Fill Leads to Quick Reversal, is There Conviction?

The FTSE 100 probed 6,500 to start the week as bulls stood at the helm after a bullish break higher. On Tuesday, however, risk appetite took a backseat as traders likely reduced exposure ahead of Wednesday’s FOMC rate decision which has the potential to significantly shake up market sentiment. That being said, the upcoming decision from the Federal Reserve may dictate broader market sentiment that could be responsible for FTSE’s next move.

FTSE 100 Price Chart: 4 – Hour Time Frame (January – June)

FTSE 100 price chart

To be sure, price trends will be difficult to establish ahead of such a large event, so any consistency may have to wait until after the meeting. Either way, the FTSE 100 remains within the confines of an ascending channel that – if it remains intact – should continue to aid the recovery rally. Thus, the two major technical levels to watch are the upper and lower bounds at 6,625 and 6,160 respectively. On the lower side, prior support near 6,200 may also offer buoyancy.

As for the Fed, much discussion has been had over the possible policy paths at their disposal. Forward guidance, yield curve control, GDP targeting and negative rates have all been mentioned by market commentators, but it is still relatively unclear what the central bank will announce – although negative interest rates seem to be off the table. While the FTSE 100 is most concerned with the policy of the Bank of England, the Fed is most responsible for the Nasdaq, Dow Jones and S&P 500, which have been leaders of the coronavirus recovery. As a result, apprehension ahead of the event is within reason, but the follow-through is what should be most concerning.

A significant change in stance in regards to the depth of the Fed’s accommodation could see Tuesday’s turbulence turn into a larger retracement that might threaten the channel formation. Regardless, IG Client Sentiment data reveals retail traders recently shifted their positioning to net-long the FTSE 100 for the first time since June 1.

Since we typically view client data as a contrarian indicator, this may suggest the FTSE 100 reversal will continue, but prudent strategy would suggest waiting on the sidelines until the rate decision has passed. In the meantime, follow @PeterHanksFX on Twitter for updates.

--Written by Peter Hanks, Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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