The FTSE 100 rallied a bit on Tuesday to break above the top of the hammer that formed on Monday. While people will use this as a buying signal, another thing that you should pay attention to is that we recently bounced from significant support.
For example, the 6800 level is an area that has been paid attention to quite significantly multiple times, as we have seen the market bounce from there a couple of different times. The 200-day EMA currently sits at the 6845 level, which is a major indicator for trend defining that a lot of people will be paying close attention to. Beyond that, the Monday candlestick was a bit of a hammer, but that is not necessarily reason enough to get long quite yet.
Stock markets around the world continue to look a bit cautious, as we are worried about the Evergrande nonsense coming out of China, and the knock-on effect that it could create through the credit markets. In fact, indices around the world did recover on Tuesday, but Monday was a bit of a bloodbath in multiple countries. If we were to turn around and break down from here, and perhaps slice through the 6800 level, then it is likely that we could go much lower. That obviously is an area that will attract a lot of attention and perhaps even volume. At that point, I would anticipate that the market would go looking towards the 6500 level.
On the other hand, if we were to turn around and break above the 50-day EMA and, by extension, the 7000 level, then it is likely that the FTSE 100 will go looking towards the 7200 level, which is a recent top that we had challenged. If we can break above there, then the market is likely to become more of a “buy-and-hold” type of situation. This is a market that tends to be choppy and noisy, so you need to be cautious about your position size and let the market tell you which direction we are getting ready to move towards. In the meantime, I expect a lot of crosswinds.
