The FTSE 100 has settled in a broad sideways formation for the past few weeks, trading between the 6,650 and the 6,750 points levels. This was the aftermath of the previous uptrend that has led the UK index to such highs but this uptrend is long gone now and the question that needs to be answered is whether the exit from this formation will be towards higher or lower levels.
Normally I would think that with the UK economy doing moderately well in recent times and with the Bank of England supporting the economy’s potential to handle a higher interest rate policy sometime in the next year the way to go would be lower. You see a move towards a higher interest rate policy always leads to losses in the stock market as money isn’t that cheap any more.
However what we must take into account here is the timing of this prediction. It’s the second week of December and everyone’s mind is set on the holidays’ season and how to best spend this time with family, friends, away from work and so on. So in times like these the money markets are usually quieter, less active and trading volume drops significantly.
And that’s a perfect place for increased volatility and unpredictable developments to occur. So even though the fundamental views point towards a reversal to the downside I would be more careful as we approach the final weeks of the year. This is not to say that I think a break higher should be expected, this is me saying that in periods of reduced volume all bets are off.
Looking ahead in the present week, I believe that the sentiment is bearish and again my key pivot point for the FTSE 100 remains at the 6,650 points. A technical level that I have mentioned many times in my notes to you as it appears to be the most important support area for the short term.
Any breaks below that should lead to considerably lower levels but as I mentioned above, caution is advised. Personally I wouldn’t be surprised if we saw the FTSE breaking below this level, staying there for a couple of days and then reversing its course and trading above the 6,700 points again! It wouldn’t have been the first time the market rallied in the final weeks of the year.
So to sum it up, the FTSE 100 is trading sideways with the sentiment pointing towards a considerable correction to the downside but due to the uncertainty these last weeks of the year always bring along you should be very careful in your trades and focused only on short-term opportunities.
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