Investor sentiment and equity markets have tumbled recently. The risk-off move and subsequent shift to defensives as well as safe-haven currencies has seen the FTSE 100 fall more than 100 points from Wednesday’s highs as US stocks recorded their first 1% daily decline in 109 sessions.
Although no precise catalyst for this shift in market sentiment can be pinpointed, we can say with clarity that beneficiaries of the ‘Trump Trade’ have been hit particularly hard. Growing fear that Trump will fail to repeal Obamacare has led investors to suspect that such a failure could undermine the rest of his legislative agenda.
Of course, the question everyone’s asking is ‘what's next for the FTSE?’
FTSE 100 Hits Support
Following the FTSE’s recent selloff, the index is now trading just above a key support level at 7,300. The support zone is formed by the mid-February swing high and the March 9 hammer-candle close (labelled S1). Focusing on Wednesday’s price action, we note that the FTSE 100's touching and rebounding off this support zone has further highlighted the significance of this key level.
Moreover, this horizontal zone coincides with an emerging trend line. Confluent support from a key horizontal level and trend line should not be dismissed lightly and hence we wouldn’t be surprised to see the index move higher from here. Lest we forget, the index remains locked in a stellar longer-term uptrend.
If Support Breaks
Bears will counter by pointing to the pace of the recent sell-off. With the index currently trading below its January 17, March 2 and March 17 swing-highs and the index over 100 points off its most recent highs, they have a point.
Putting our ‘bear hat' on, we note that any break-and-hold below Wednesday’s lows, not exactly far away, could in turn pave the way for this retracement to roll on. In that scenario, we would have a clear change in market structure and as such, would expect the index to leg lower to the next support level found at the March 9 lows (S2). Any break below this would mean the February 24 lows (S3) would be in sight. Here we note that neither of these support levels are well established.
As such, I hope you can see that price action in the coming sessions will be key in determining whether this retracement will roll on, or if the FTSE 100’s stellar run will kick back into gear.