FTSE 100 Maintains A Bearish Bias Ahead of ECB Meeting

2016-01-21 11:00:00

Alejandro Zambrano, Market Analyst

Talking Points

Traders would need to breach Tuesday’s high of 5917 to end the bearish trend of the FTSE 100
The FTSE 100 should be trading closer to 5906 to be in line with the DAX 30 and Commodity markets

The FTSE 100 (FXCM: UK100) is higher by 0.67% at the time of writing. However, the downward trend remains in place and for it to end, traders would need to breach Tuesday’s high of 5917. With this in mind, I anticipate that traders will use a rally to the 5758 to 5830 range as an opportunity to short the DAX 30, with stops above Tuesday’s high of 5917. Traders are expected to aim for yesterday’s low of 5600.

If the FTSE 100 breaks this low, we may see a slide to the July 2012 low of 5450 triggered.

On the other hand, our fair value model based on the Bloomberg Commodity index suggests this will be hard. Using the last six months of daily data suggests that the FTSE 100 should be trading closer to 5906 as the index has declined more than commodity markets would have suggested. Using the DAX 30 as an explanatory variable suggests the same i.e. the FTSE 100 is oversold and should in fact be trading closer to 5906.

Will the ECB Help?

Traders are anticipating a dovish tilt for the ECB. They are looking for comments suggesting they are concerned about the development in oil and stock markets, and how this may delay inflation reaching ECB’s 2 percent target. However, with rate cuts implemented in December and more upbeat data emerging from the Eurozone as of late, I think the ECB will stick to their current plan which may in turn soften the FTSE 100.

In the afternoon U.S. Jobless Claims and Philadelphia Fed Index are on tap. Better than expected outcomes may limit the slide in the FTSE 100, but it will probably not be enough to end the bearish trend.

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FTSE 100 | FXCM: UK100