Monday, October 4, 2010

FTSE 100 Prediction - October 4th 2010

The Bears have fortified their position in the FTSE 100 at the 5,600 level and fought back bullish attacks for over 16 days. The fighting was fierce and casualties in the bullish camp, while not yet severe, started to accumulate. The FTSE 100 has rallied 16.88% from its summer intra-day low of 4,790.00 to its highest close of 5,598.50 on September 24th. Market moves on September 28th, 29th and 30th further illustrated severe resistance around the 5,600 level with a hanging man, spinning top and a bearish inverted hammer formation respectively at the top of a rising wedge formation.

The FTSE 100 has a somewhat unique "problem"

The FTSE 100 is a commodity heavy index and always carries a little stumble block with it. Commodities are traded in U.S. Dollars, which is a terrible thing as it is but that is a different story and will likely be solved over the next few years, and they have enjoyed an inverse relationship. The U.S. Dollar drops, the price of commodities increases. Since the FTSE 100 is a commodity heavy index, just like the ASX 200 over in Australia, it tends to get a little extra boost at times and vice versa. It is important to keep that in mind as you trade and invest. Financials are also a leviathan in the FTSE 100.

Will the FTSE 100 correct in a similar fashion the S&P 500 will collapse?

The FTSE 100 will correct once the Bears will launch their counterstrike from the 5,600 level. So far they have allowed the Bulls to charge into resistance and get tired. The 5,800 level offers an additional layer of support for the Bears who have massive reinforcements at that level, which are not likely to be mobilized.

A rather interesting secondary battle which will impact the strength of the correction for the FTSE 100 is again centered around the commodity issue. The secondary battle will be taken out between the lift commodities get from continued U.S. Dollar deterioration and the decrease in demand for commodities. Ultimately, the Second Wave of the financial crisis will eradicate the lift from the weak U.S. Dollar and the effect on the financial sector will bring down the FTSE 100 along with the rest of major markets.

In addition, the FTSE 100 is already overbought and momentum has started to shift to the downside which should be accelerated as third-quarter earnings season will fall short of reduced expectations with fourth-quarter guidance which should point to a further contraction in economic activity in the near future.

A few levels to keep in mind

Over the next twelve weeks, the FTSE 100 should correct to a level of 4,478.80 with a range between 4,344.44 and 4,613.16.

Some Bulls out there will try to push the FTSE 100 to the 5,800 level and after that to the 6,000 level so traders be careful. Data this week should create nice opportunities to initiate a few short positions, but what out for some Bulls who have yet to be slaughtered which could cause a minor temporary headwind. Don't move full force, Bulls are stupid so use that against them.

Photo Credit: The picture in the top left corner was created by Simon Howden and downloaded for free use at freedigitalphotos.net.

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