After a very strong January and start to 2018, February has seen somewhat of a change of scene - Friday's sell off was very sharp and the Dow had its worst drop since June 2016 with Asian markets extending the sell off during Monday. This is against a backdrop of fairly robust news results, but a pullback has been expected. But when does a pull back become something more serious?
Generally the consensus is still that it is a long overdue correction, similar to that being experienced by Bitcoin. News flow until this point has been pretty positive, with NFP on Friday coming in well, and earnings generally also being good. However, there is a little bit of more pessimistic news creeping in - consumer spending slow down (Christmas 2017 spending was lower than previous years for example), and a general feeling I get that people are starting to wake up to the fact that a lot of prices are a bit of a rip off, and thus reigning in spending. Coupled with interest rates starting to slowly increase and static wage growth, along with a real inflation rate of nearer 10% in the UK, we may well see that feeling roll through into markets over the next 6 months - then we are likely to see further declines.
We have also had some high profile casualties with Carillon going into administration, Capita (LON:CPI) on the ropes, and I expect some other big retail names struggling.
The sell off in the US has come as investors question whether the Fed will keep to a gradual pace of monetary tightening, and whether it may need to end up boosting interest rates by more than previously expected in coming years. A higher so-called terminal rate for the Fed’s target implies higher long-term yields - raising borrowing costs across the economy.
Jerome Powell will be sworn in as the new chair of the U.S. Federal Reserve Monday in Washington.
FTSE 100 Outlook and Prediction
There is initial support at 7365 to start with today, however the futures prices did drop a lot lower than that overnight to test the 7320 level and have then bounced back to the 7365 area. The bottom of the 10 day Raff channel for today is 7315 so it has held its first test by the futures prices. Below this 7365 then we have a key fib level at 7343 which may well hold initially with in hours pricing. I think the Bull Monday pattern might be a bit of a hard sell today, but if the bulls decide to buy the dip then this 7345 to 7365 area looks good. A break of 7345 however is likely to see a trip to S3 at 7229, so it will be worth shorting a break of that support.
Resistance wise for today, there is 7370 initially which is a back test of the 20day Raff channel - and right on the 7365 support so this area is pretty key for today. Above that then the daily pivot is 7427 and if the bulls do fight back today then we may well get a rise to this area. There is also the gap for Fridays closing price at 7443 which will also act as a draw for the bulls. Depends if they are brave enough to start buying yet! Above all of these, and maybe a level not likely to be reached today, is 7469 where we have a key fib level.
Volatility is certainly back with a bang, and the FTSE is well off the 7795 recent high. This week should see whether the sell off continues or if its the much awaited pullback and the bullish trend continues. The daily moving averages have crossed over to bear with 7604 as resistance so worth keeping an eye on this area too. The 2 hour chart remains bearish and we will need a decent bounce to make that go bullish, with the bulls needing to capture and hold above 7444. Not impossible but maybe a big ask in the very short term.