By Ameya Joshi, Mihir Gupta and Sukrith Kumar (University College London) and Filippo Palacino (ETH Zurich)
Originally owned by the Financial Times and London Stock Exchange, the FTSE 100 index is an index consisting of the top 100 ‘blue-chip’ companies in the United Kingdom, weighted by market capitalization, calculated on December 31 of the year. The performance of the index usually reflects the state of the largest companies in the UK and can indicate confidence in the UK economy.
The FTSE index price is affected by factors such as economic shifts, political changes and news in the UK, and potentially Europe. Announcements regarding inflation rates, GDP statistics and LIBOR, for example, further affect the FTSE 100 price. The top 10 companies with the greatest weighting, hence largest market capitalization, in the FTSE 100 index, are as follow:
Index: FTSE 100 (6016.65 as on 09/10/2020)
Support and Resistance Levels
Graph 1: Support and Resistance analysis for FTSE 100 (Investing.com as on 11/10/2020)
As on 9th October 2020, FTSE 100 closed at 6,016.65, after having increased by 38.47 points since the start of the trading day. The index was on a path of steady recovery after the COVID-19 crash in March but has been in a downtrend since June and appears unlikely to reach its pre-COVID-19 position of 7,400 points. This is not unexpected as the FTSE 100 has tended to recover slowly from past shocks. It took two years to recover from the 2008 financial crisis and six years to recover from the Dotcom crash. Combining this with a multitude of factors such as the rising cases of COVID-19 since September (the start of the academic year) and uncertainties regarding Brexit, it is not surprising why the index is in this slow downtrend and why traders have been hesitant to trade in a bullish manner.
As per our analysis, we believe that the index is trading close to its immediate resistance of 6016.65 and the immediate support level for the index is at 5,897.25 (as shown by the yellow rectangles in Graph 1). Furthermore, some of the other crucial levels in addition to the immediate support and resistance levels are 6,090.10 and 6282.02 on the upside (as shown by the orange and blue rectangles on the upside respectively in Graph 1) and 5909.23 on the downside (as shown by the orange rectangle on the downside respectively in Graph 1).
Graph 2: Fibonacci Levels for FTSE 100 (Investing.com as on 11/10/2020)
The strength of these levels is further guaranteed by plotting the Fibonacci levels for the index on a downward basis (as shown in Graph 2). More specifically, the strength of the 6,090.10 on the upside and 5,909.23 on the downside is backed by the fact that indeed 6.097.21 and 5,867 are the 0.618 and 0.5 retracement levels, respectively.
Trend and Pattern Analysis
Graph 3: Trend Analysis for FTSE 100 (Investing.com as on 10/10/2020)
After having bottomed on 23rd March, 2020 due to the COVID-19 pandemic, the index witnessed an uptake in activity - thereby entering a rising wedge. However, in comparison to some of the other major global indices - the uptake in the FTSE 100 was not long lasting. It was exhausted in the middle of June with both, the rising wedge and the higher-high higher-low formation being broken. Additionally, the lower bound of the rising trendline (as shown by the black lines in Graph 3) that had been acting as a support till now emerged to become the immediate resistance for the index which it was unable to breach.
Ever since the index has been forming a falling wedge and has been in a downtrend (as shown by the blue line is Graph 3). One thing that we’ll like to highlight with respect to the candlestick movement of the index is that although it is in a downtrend at large, the formation of trend reversal patterns within the established range has been particularly strong indicators of the course of the index for the next 1-2 weeks. For example, what followed the bullish engulfing patterns formed on 3rd August 2020 and 7th September 2020 was a move to the upside by approximately 400 points, Similarly what followed the bearish harami pattern formed on 7th July, 13th August and 16th September 2020 was a move to the downside by approximately 300 points.
These are particularly important observations because over the last week the index has witnessed a move on the upside such that it has reached the upper bound of the wedge. In such circumstances, the candlesticks formed in the next 2-3 days become extremely important as they would be indicative of the future direction the index would tread on, in the coming 1-1.5 weeks. Consequently, if we witness a bearish reversal pattern be formed, we can expect a move of approximately 50 points on the downside. However, if the index was to breach the falling wedge and breakout from it, we can alternatively expect a move on the upside till the 6,062.3 which has also been highlighted as one of the crucial levels following the immediate support and resistance level.
Graph 4: Double Bottom Formation in FTSE 100 (Investing.com as on 10/10/2020)
In fact, in line with our trend analysis, the importance of the candlesticks in the next two-three days would also be indicative of whether or not the double bottom pattern that the index has been forming 3-4 weeks was a formation or not. However, as it can be seen in Graph 4, there is still a gap of approximately 90 points that the index needs to fill (as highlighted by the yellow box in Graph 4) before it breaks out and gives a significant move on the upside. Nonetheless, we would like to highlight that if the index was to break out from the current level, it would be a particularly strong signal for a trend reversal as the success of the double bottom formation would be coupled with a break of the falling wedge formation that the index has maintained since early June.
Exponential Moving Average and DMI Analysis
Graph 5: 21-day/ 8-day Exponential Moving Average and DMI Analysis for FTSE 100 (Investing.com as on 10/10/2020)
As highlighted in our previous reports, the 21-day and 8-day Moving Average analysis are particularly useful in observing any significant crossovers that may have occurred in the recent trading sessions. Additionally, the Directional Movement Index (DMI) allows us to understand the spread of the buying and selling pressure in the index alongside giving us an insight into which of the two is dominating. Keeping those ideas in mind, we observe that only very recently (i.e. on 8th October 2020) the index witnessed a positive crossover emerge between the 21-day and 8-day Exponential Moving Average lines. In fact, this was coupled with a positive crossover in the DMI as well (i.e. the +DI green line overtaking the -DI red line) - thereby highlighting a return in buying pressure.
Although, in normal circumstances - we would take this to be indicative of a potential surge in buying pressure, in this case, we are sceptical primarily because of two reasons. Firstly, historic analysis of such positive crossovers within the DMI indicates that they have not sustained for long periods and have hardly been powerful (as highlighted by the yellow boxes in Graph 5). Secondly, the same is the case with the Moving Average positive crossovers. They have hardly sustained, and in fact, have instead trailed the downtrend. Resultantly, we believe that only once there is a powerful breakout with above the average volume levels, should we expect a significant move on the upside and a reversal in the trend.
Bollinger Band and RSI Analysis
Graph 6: Bollinger Band Analysis for FTSE 100 (Investing.com as on 10/10/2020)
As it can be seen in Graph 6, the candlesticks have been ‘squeezing’ within the Bollinger Band since the beginning of June. In fact, both the upper and the lower bounds of the band have been acting as extremely strong support and resistance levels, with none of them getting breached ever since. As we move into the coming week’s trading sessions - we believe that traders/investors should ideally watch out for a breach above the upper bound of the band, as it could be a strong indicator for a reversal. The best indication for this would be to wait for a two-consecutive same colour candle breach of the upper bound.
Graph 7: RSI Analysis for FTSE 100 (Investing.com as on 10/10/2020)
Lastly, we would like to end with a note on the analysis of the Relative Strength Index (RSI) of FTSE 100 for a 14-day period. As it can be seen in Graph 7, the 56.1 level (as shown by a black line) has been an extremely strong resistance that the index has been unable to breach. Provided that it ascended to that level over the past couple of week trading sessions, a breakout from the current level would support a reversal indication. However, this must be accompanied by strong volumes and no weak or strong negative divergence.
To conclude, on the whole, we believe that although the index has been in a downtrend - all indicators are highlighting a possibility for a trend reversal. However, this is hugely dependent on the events that shape the course of the index in the coming week. Resultantly, all of the indicator point movements across the candlesticks and the wider indicators used as part of our analysis should assist traders/investors to substantiate a viewpoint and determine the course of the index in the coming weeks.