Last week’s Trump’s–Comey spat feels like a distant memory as equity markets retest all-time highs.
Let’s take a look at some of the powerful price patterns that are taking shape now across the S&P 500 and the FTSE 100.
S&P 500
With US politics at the epicenter of the recent selloff, let’s start there. The bullish US equity backdrop is, of course, old news and hence I won’t rehash the drivers behind the indices ‘post-Trump’ rally.
What should be grabbing traders' attention is the indices' range compression into the well-established 2,401 – 2,405 resistance zone. This week started with the narrowest daily range in 4 sessions. Tuesday then delivered the narrowest daily range in 7, which this was topped off Wednesday by the combined 2-day range coming in as the narrowest in 20 sessions.
Equities have a statistical tendency to undergo range expansion following periods of compression and with that in mind, it’s fair to say that US equities are setting up for a big move.
The recent bullish backdrop for the S&P 500 indicates that a break of resistance is in the cards. Were this to happen, we would have a clear change in market structure, which in turn would pave the way for the index to trend higher, in line with the upswing seen from November through the end of February.
Of course breaking above a key resistance level is easier said than done. Were we to see selling pressure halt the recent rally or a break and failure to hold above 2,405, that would reinforce the significant of this level and most certainly reinvigorate the bears calling a top.
FTSE 100
Turning to the FTSE 100, the picture is just as interesting. Taking a step back, we note that the index staircasing higher over the past nine months has seen three key structural levels formed: these are market A, B and C on the below graph.
The FTSE – bouncing off a major resistance-turned-support zone and subsequently powering through the next key structural level at 7,430-7,447 earlier this month – sets the scene for the recent upswing to roll on.
As is the way with equities, broken resistance zones often reemerge as support levels, which is exactly what happened last week. We note that the FTSE 100 found support at price zone B after an initial lurch lower, following the 'let-this-go' driven reversal in risk appetite, making its way across the pond. That said, clear evidence investors are willing to buy this dip gives us confidence that a net-long bias is still the way to go.
Focusing on more recent price action does nothing to dampen this view. First, a series of higher daily lows reaffirms the trajectory of the recent uptrend. With the index pressing up into all-time highs and in the process moving into compression mode, the signs again point to range expansion for UK equities in the near term. With last week’s dip buying offering a clear indication that buying demand is strong, we foresee a bullish break higher.
However before we get too excited, let’s not forget the importance of watching the events in the US (as last week reminds us). And with the S&P 500 fighting against a long-held resistance level, it is key that traders remain nimble and ready to react if UK and US equities falter at their current levels.