The FTSE 100 broke down significantly during the trading session on Monday, as indices around the world are starting to price in the idea of the risk of contagion on the Chinese mainland. Evergrande has been across the headlines recently, as people are starting to worry about a major bubble being pumped in China. If that ends up being something that has a bit of traction, then you could start to see a lot of risks when it comes to default. In general, it is a “risk off” type of scenario.
The 6800 level underneath should be supportive, as it is a large, round, psychologically significant figure, and an area we had bounced from previously. It is also worth noting that we had broken down below the 200 day EMA, which of course is a very important indicator that a lot of people will pay close attention to. With that being the case, I think that closing below there is a potentially negative sign, but if we were to turn around and take out the top of the candlestick from the Monday session, that would show a complete reversal and we could go much higher. At that juncture, the market is likely to go looking towards the 50 day EMA.
Keep in mind that the market has struggled to take off to the upside, so I still think that if we show signs of exhaustion, it is likely that we will see sellers yet again. All things being equal, if we break down below the bottom of the candlestick from the Monday session, then we could very well go looking towards the 6600 level. The size of the candlestick is of course very negative, so that could open up a huge move lower as it shows conviction to the downside.
The market certainly looks as if we are at the very bottom of the overall range, and therefore I think what we are looking at is a scenario where the market looks very threatened, and of course the FTSE 100 tends to move right along with risk appetite overall. The risk appetite certainly has taken a huge bashing overnight, and it is likely that we are still going to be threatened to the downside. As far as buying is concerned, I would still do so in very small bits and pieces, even if we do get a signal of strength.
