When an instrument attempts to break out three times and failed, chances are high we are looking at a potential reversal.
Look at the UK FTSE 100 Index. The equity index has been mired in a corrective mode since peaking at 7,700 on July 30. But much of its recent drop came from a big downward dynamic on August 5. After that decline, the index tested the downside three times. Each failed to lead to downside follow-through, ie, more price decline. The index remains firmly north of the psychological 7,000 level despite all the political turbulence the country is enduring right now (see Featured Chart).
As prices rebounded back into its near-term highs, it is possible that the index may overturn its month-long downtrend. A quick check on some of the heavyweight – and underperforming – FTSE 100 stocks reveals near-term upside potential. For example:
Royal Dutch Shell (A) – Downtrend finding some support near its prior lows at 2,220p.
BHP – After a 10-15% correction, the stock is rebounding off the key 1,700p support.
HSBC (HSBA) – This Asia-focussed bank has been under siege as HK slips into political turmoil. The bank board even sacked its underperforming CEO. But the stock is near-term oversold – and may be susceptible to a rebound.
All in all, I would not rule out a further counter-trend rally in the FTSE 100 Index. This is counter-intuitive because the headline news are so UK-negative. Well, history tells us that over the near term stocks prices and news often diverge, e.g., stocks rally on negative news. Hence some tactical buys may be warranted on equity indices like FTSE 100 to position for an September bounce. Stops are advised.
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Jackson has over 15 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.