The FTSE 100 is trading near its extremes as we move closer to the New Year

The FTSE 100 is trading back above the 6,700 points again after a volatile last week that saw the UK index changing direction a few times. We have now witnessed an overextended uptrend during the last month that allowed the FTSE to cover a 300 points’ distance and the question that usually comes to mind after such rallies is whether this has gone too far.
Technical indications suggest that the London benchmark index is trading pretty near the top of its channel and as we get closer and closer to such extremes a further continuation of the current price action becomes more difficult. The momentum to the upside has been fading and one could suggest that the last upswing during the previous week was a last attempt to drive the index as high as possible before it reverses.
Apart from the technicals however we need to consider the fundamental environment as well and take into considerations investors’ state of mind. I think that as we move closer to the end of the year and start to discuss the outlook of the domestic economy going into the next the discussion around a higher interest rate policy will become more frequent.
We have seen that during the past few weeks the issue of when the BoE will hike the interest rates’ levels has been pushed further into 2015 by some discouraging economic reports but remember that markets are primarily fueled by expectations and speculation. And by that I mean that as soon as investors start to think that they’re entering a period where rates will rise they will want to protect themselves against this development and they will want to do it ahead of time.
So what I think is going to happen in the week to come is a correction, a move towards lower levels where the current support levels lie. I believe that a pullback towards the 6,650 points area would be justified at this time as I regard this area as an important pivot point for the short term. I wouldn’t go as far as suggesting that a push below this level should be expected but I believe that traders should be prepared for this contingency as well.
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