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FTSE 100: Levels To Watch In 2016

FTSE 100: Levels To Watch In 2016

2015-12-31 11:55:00
Alejandro Zambrano, Market Analyst
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FTSE 100: Levels To Watch In 2016

As we head into New Year we look at the weekly FTSE 100 chart to get an idea of which levels to watch in 2016.

Technical Outlook Is Bearish

It’s quite clear from a technical point of view that the FTSE 100 lost its bullish momentum and turned bearish in 2015. We can see this by the break to the upward slopping trend-line, and the October high at 6482 being lower in relation the 2015 high at 7120.

This by itself warrants a new test of this month’s low at 5862. If the 5862 low does not hold as support then this may trigger decline to the next support level, which is the November 10 2012 low at 5594 (with a break to 5594 triggering a decline to the May 2012 low at 5232).

However, while this makes perfect sense from technical point of view. It is seldom traders get rewarded for holding a bearish view as most of the time equities trade higher.

It is only during certain periods like every fourth year when the economy heads into a recession which triggers a major stock market decline. When this is unfolding it makes sense to short stocks.

All other times a bearish decline will last one to two weeks with the bulk of the decline occurring with an even shorter time space. As an example, this year the FTSE 100 declined 1337 points from its yearly high to its yearly low, however, 750 points (56% of the total drop) occurred over 4 days. This means that if you missed out 4 days of the total 259 trading days of 2015, your gain would be 56% lower.

This makes it hard to profit on short positions.

Get ahead in 2016 – Read The Traits of Successful Traders Guide

With this in mind I have preferred the bullish side and bought on dips rather than short-selling. This also made sense as economic growth, which while it was weak never turned into a full-blown recession. And as suggested earlier, a full-blown recession is usually needed for stock markets to trade substantially lower.

As I am bullish on economic growth in 2016, see the likelihood of the FTSE breaking to new lows in 2016 as low probability scenario. Rather I would work with the idea of the 5870 low holding as support and traders looking to buy if reach this this level. The alternative scenario is a break to the October high at 6487. In this scenario the trend turns bullish and traders will most likely aim for the 2015 high at 7120.

My base case is for E.U. growth pick up and U.S. the economy to remain stable. With this in mind I prefer bullish FTSE 100 scenarios.

I also want to point out that the U.S. manufacturing sector is suffering and this could translate into bigger problems for the world economy. With this in mind I will keep an eye on ISM Manufacturing index in the months ahead. If the ISM keeps on trading lower the bearish FTSE 100 scenario looks more likely.

FTSE 100 / UK100

FTSE 100

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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