Technical Analysis GB100 : 2016-06-27

Brexit a surprise for UK stocks
FTSE 100 stock market index declined on Friday having opened with a sharp gap lower after the referendum results showed Britons voted for leaving the European Union. The UK economy slowed in the first quarter of 2016, and the Bank of England’s accommodative monetary policy has not succeeded in boosting inflation. Will the FTSE 100 index continue correcting down?
UK stocks fell sharply as the British vote to leave the European Union didn’t improve the uncertain UK economic outlook. The direct positive effect so far from the decision to leave the European Union is the sharp Pound depreciation, which will make British exports more competitive in overseas markets. Thus the improved external trade balance will help boost economic growth. But the prospects of the financial sector, which is one of the major sectors, deteriorated considerably with increased uncertainty the decision to exit from EU generated. The European Central Bank had warned Britain that the decision to leave the union will have significant cost implications for the British financial sector as the EU will have to review the financial regulations for British financial institutions which are an important financial center for euro denominated financial assets trade. The country will also have to negotiate new trade agreements as it leaves the EU and it cannot be ascertained how beneficial new arrangements will be for the UK economy. And the Bank of England will likely have to keep low interest rates longer to support the economy as the decision to leave the EU increased risks to downside for UK economy. The recent UK economic indicators were mixed. The retail sales rose in March and April. The GDP growth in first quarter slowed to 2% year over year from 2.1% in fourth quarter of 2015. It was the weakest growth in three years due to a slowdown in household consumption, exports and a fall in business investment. The unemployment rate fell in April to 5% from 5.1% and average earnings rose 2.3% excluding bonuses. The consumer price inflation in May edged to 0.2% year over year from 0.1% in April. Inflation in coming periods will likely rise due to weaker Pound. On June 30 Gfk Consumer Confidence for June will be released, the tentative outlook is negative for the Pound. The same day the final reading for Q1 GDP will be released, no change is expected from the previous estimate. On July 1 the Manufacturing PMI for June will be published, Industrial and Manufacturing Productions for May will come out July 7- the outlook is positive.


On the daily chart FTSE 100: D1 had been rising after hitting a four year low in the beginning of February. It started retracing two weeks ago on Brexit fears, breaching below the support line of the uptrend. The price rebounded above the support line as market sentiment improved with polls showing Britons leaning toward remaining in the European Union. After the June 23 referendum showing support for exit from EU the price opened with a sizable gap, falling below the support and rising to close most of the gap. It is below the 50-day and 200-day moving averages MA(50) and MA(200). The Donchian channel is tilted downward indicating downtrend. The Parabolic indicator has reversed to a sell signal. The MACD indicator is neutral: it is above the signal line and the gap is stable with the signal line itself below the zero level. The RSI oscillator is edging lower but hasn’t yet reached the oversold zone. We believe the fall below the last fractal low at 5898.76 will signify continuation of bearish momentum. This level may serve as a point of entry. Risks can be limited by placing the stop loss above the last fractal high at 6322.40. After placing the pending order the stop loss is to be moved every day to the next fractal high, following Parabolic signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. The most risk-averse traders may switch to the 4-hour chart after the trade and place there a stop-loss moving it in the direction of the trade. If the price meets the stop-loss level (6322.40) without reaching the order (5898.76) we recommend cancelling the position: the market sustains internal changes which were not taken into account.
PositionSellSell stopbelow 5898.76Stop lossabove 6322.40