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FTSE 100 Technical Correction Should Not Deter Bullish Trend

FTSE 100 Technical Correction Should Not Deter Bullish Trend

Alejandro Zambrano, Market Analyst

Talking Points

  • FTSE 100 pulls back, but the overall trend remains bullish
  • The Bloomberg commodity index suggests the FTSE 100 should be trading near 6100, while the DAX 30 suggests the FTSE 100 should be trading closer to 6382

The FTSE is pulling back slightly as European stock markets give back some of the last few sessions’ gains. At this point I am treating the decline in the FTSE 100 as a technical pullback as we lack a strong reason to expect a multiday reversal at this point in time.

However, I note that the FTSE 100 is getting a bit rich in relation to commodity markets. Regression analysis using the last six months of daily closing prices and the Bloomberg commodity index as sole explanatory variable, suggest the FTSE 100 should be trading near 6100. Commodities would therefore need to rise further to justify the FTSE 100 at current levels or the FTSE 100 would need to trade lower. The current six month correlation between these two variables is 0.65 while the R^2is at 0.42. I use the commodity index as it explains some of the variation in the FTSE 100, given its exposure to the commodity sector.

Using the DAX as an explanatory variable places the FTSE 100 at 6382, which means the FTSE 100 has further to rise before it catches up with the DAX. The current six month correlation between these variables is 0.80 while the R^2is at 0.65.

At this point I place higher emphasis on the DAX leading the FTSE 100 higher rather than the FTSE 100 trading lower on commodity markets as the seasonality pattern this time a year favors the long positions. Also the DAX is better in explaining variations in the FTSE 100.

Technical Levels

As long the FTSE 100 trades above 6100 I will remain bullish. A pullback to the 6200-6277 range will probably be met by buyers left behind. I expect the FTSE 100 to reach 6400 as long as the index trades above 6100. The only data ahead of us in today’s session is U.S. Pending Home Sales. A Bloomberg survey projects a rise of 4% year-on-year. I don’t expect this economic indicator to carry too much weight in people’s trading decisions.

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FTSE 100 / UK100

FTSE 100 Technical Correction Should Not Deter Bullish Trend

Created with Marketscope/Trading Station II; prepared by Alejandro Zambrano

--- Written by Alejandro Zambrano, Market Analyst for DailyFX.com

Contact and follow Alejandro on Twitter: @AlexFX00

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