The FTSE 100 opened the trading week heavily in the red towards the 6,700 level, following another bearish weekly technical close week under the 7,000-level due to broad-based global equity selling.
As traders focus on the debt ceiling and the Chinese Evergrande situation this week, perhaps the biggest risk factor for the FTSE100 is US stock markets, and the big pull it could have on the leading UK stock market.
The DJIA, NASDAQ, and S&P500 all opened up the week heavily in the red, and now look braced for more downside losses which could create significant bearish momentum in the FTSE100 and UK stocks.
A strong price correlation does exist between the Dow Jones Industrial Index and the FTSE100 and to a lesser degree the S&P 500, which is a proxy for global risk due to its high weighting of tech stocks and the fact that is an investment and pension fund favourite.
We should also consider the United Kingdom’s close trading relationship and overall business relationship if the debt ceiling debacles lingers into something uglier, let alone the China Evergrande situations.
The fundamentals also look quite bearish for the UK economy, as markets get ready for the Bank of England policy meeting this week. It is likely that the central bank will warn of economic stagnation and the downside risks for businesses and hiring due to the coming increase in UK National Insurance Tax.
Sentiment towards the UK100 is also increasing, despite the recent price plunge as traders become too confident about this latest price dip. According to the ActivTrader platform, some 87 percent of traders are bullish towards the UK100.
This says to me that the bottom is probably not in yet for the FTSE100, and it may have substantial room to fall. After all, these types of heavily one-sided and wrong-sided sentiment skew rarely end.
UK100 Short-Term Technical Analysis
The four-hour time frame shows that the FTSE100 is still forming a complex inverted head and shoulders pattern, which holds a massive 500 points of upside potential if activated.
It would be hugely bearish if the pattern is invalidated this week as the FTSE100 could stage a massive price drop. Overall, keep a close eye on the 6,800 level for direction guidance.
UK100 Medium-Term Technical Analysis
The daily time frame shows that the UK100 remains trading inside a large rising price channel, with the price now edging much closer to the bottom, rather than the top of the top.
A move towards the 6,500 level could provide a significant buying opportunity if a further big down move takes hold. Furthermore, lower and higher time frame analysis are both pointing towards the 6,500 level.