Medium term
Trade view / 29 May 2015 at 5:23 GMT

FTSE100 gets ready to stretch

Instrument: FTSE100.I
Price target:
Market price:
Background

The FTSE100.I has been a real laggard relative to, for example, the US and European equity markets since the setback that started on May 21, 2013. It is just recently that this market has managed to finally establish price action above that very peak set more than two years back. 

The overall structure in the FTSE100.I isn't a different story than, for example, the DAX.I or the OMXS30.I, as in those indices I am looking for a final fifth wave of the fifth wave from the European crisis low set back in 2011.

Looking at the price action from the bullish cycle that started in mid-October last year, I can so far see wave i, wave ii, wave iii and a possible wave four before an expected fifth wave higher. What is different in this index compared to many others, is that the FTSE100.I has managed to stay very close to its April highs during the recent weakness. This is the tale of strength from a relative perspective.

Looking at the price action from the mid-April peak and the one set on April 25, price is building a compressed pattern; a pattern that could very well be setting up to stretch higher in an extended cycle wave. Resistance is currently located at the 7,065 area and a break above this level could trigger a third wave breakout within the medium-term fifth wave cycle. These quite bullish prospects remain as long as this index can stay above support at the 6,920 level.

Management and risk description

The plan is to buy the FTSE100.I in anticipation of a third wave breakout. Since the third wave is often the strongest move in a cycle, both from a time and price perspective, we should be able to track price with a fairly tight stop. 

The buy trigger is a break above 7,065 with a stop at 6,920 and a target of 7,209, 7,383 and 7,500. Once the first target is reached, move the stop higher to the 7,000 level and consider taking partial profits. Once the second target is reached, move stop to entry and trade towards the third target.

I have two scenarios for the setup to trigger: one is an immediate breakout above resistance (shown in the immediate breakout count chart below); the second would allow for price to take a brief dip before turning higher (shown in the triangle breakout count chart below). In the second scenario it would be okay for price to fall back all the way to 6,930 without ruining the picture why it is important to wait for a break above resistance before going long in my opinion.

The risk with this setup is a fake breakout that triggers the trade only to reverse lower to take out our stop, thus possibly completing the bullish cycle off the mid-October lows.

Parameters

Entry: Buy a break above 7,065

Stop: 6,920

Target: 7,209, 7,383 and 7,500

Time horizon: 1–4 weeks depending on target

FTSE100.I daily cfd chart - immediate breakout count
FTSE100.I daily cfd chart
FTSE100.I daily cfd chart - triangle breakout count 
FTSE100.I daily cfd chart
 

FTSE100.I daily cfd development chart
FTSE100.I daily cfd development chart
 Source: all charts Saxo Bank 
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— Edited by Gayle Bryant

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Non-independent investment research disclaimer applies. Read more
4y
JulieDeiy JulieDeiy
This comment has been redacted
4y
fxtime fxtime
FWIW I only have 7330 as my max high. The ftse100 constituents are heavilly biased to minerals and commods with a dollar value. Whilst they accrue a proportionally higher profit as the dollar rises and is brought back into sterling the commods market is weak. Oil and Ores need to rally to support any real ftse breakout as currently the banks which have an equal weighting to commods are putting exactly exciting the market at present.
4y
Johan Berntorp Johan Berntorp
I wouldn't be all that surprised to see the Mining sector going on a bull streak, infact it might have started already. Appreciate your comment as always.
4y
fxtime fxtime
FTSE appears to be having a stop run exercise today...not unusual for month end. However the break below the prior 7000 cash price level is a concern. This market must close above that former support level to regain momentum. A close this evening (9pm BST) below the 7000 value implies a retrace.
4y
Johan Berntorp Johan Berntorp
Yes, I would definitely not rule out a test of 6 930 - 6 920 now. The US markets looks like it could do another 1 % on the downside from were markets need to turn higher not to get caught in a larger retrace lower in my opinion. An immediate breakout attempt appears to have failed for now...

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