Chart Of The Day: FTSE Bull Flagging
Fawad Razaqzada | Feb 12, 2021 11:08
This article was written exclusively for Investing.com
There was a mild risk-off tone in the markets at the time of writing, with European stocks opening weaker and US futures drifting. Some investors appear happy to book profit on their long equity positions ahead of a long weekend in the US, as banks will be closed Monday in observance of Presidents' Day.
Chinese markets meanwhile will remain shut until Thursday due to the Spring Festival. Crude and copper prices have also eased back. Thursday’s weaker US jobless claims report and last Friday’s subdued payroll growth both point to weak conditions in the world’s largest economy, even if the future looks bright with the ongoing COVID vaccine rollouts.
But while the US markets may look overextended and some profit-taking is warranted, the UK’s FTSE 100 hasn’t looked too hot of late and so it may have a lot of catching up to do on the long side—especially with the pound now easing back a tad.
In fact, I am quite bullish on the FTSE. With a no-deal Brexit being avoided at the back end of last year and the UK is leading its neighbours in the vaccine race, the economy should be able to rebound quicker when lockdowns end. In fact, data released this morning showed the UK economy had already bounced back strongly in December, with the 4th quarter GDP also coming in stronger than expected at 1% vs. 0.5% eyed.
The trouble for the FTSE has been the rallying pound. The FTSE 100 constituents earn big portions of their profits abroad. When foreign earnings from these multinational corporations are exchanged for the pound, their profits appear less rosy than they do in dollars or euros. The stronger pound is also negative for UK exports, as it makes UK goods and services appear dearer overseas.
Still, with UK and global monetary conditions being favourable and government spending high, then the FTSE should, in my view, be able to rise over time as investors price in a strong economic recovery, regardless of what the pound does in the interim.
In fact, the FTSE is potentially gearing up for a big break out as it is currently residing inside THIS bull flag pattern:
If the index manages to hold its own around the key support are of 6500, which was being tested when the report was being written, then a breakout above the resistance trend of the bull flag could be on the cards very soon, possibly as early as later today.
If that happens today or early next week, then the FTSE could be in for a sizeable rally.
Specifically, the trigger point is likely to be at 6575, the most recent high. A move above that level could lead to an immediate jump to the next trouble area around 6635. Thereafter, there’s not much further resistance until this year’s high around 6900.
But potentially, the FTSE could go much higher over time for the macro reasons stated above.
However, the bulls must remain patient and wait for that breakout above the bull channel before potentially looking for any long trades.
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