FTSE Technical Outlook – Revisiting a Big-picture Topping Scenario

FTSE TECHNICAL HIGHLIGHTS:

• Long-term ‘RST’ pattern gaining traction
• Failed rally attempt after pullback is key
• Pattern implicates a decline to sub-6000

LONG-TERM ‘RST’ PATTERN GAINING TRACTION

Back towards the end May we discussed the prospects of a macro top forming in the FTSE should price action in the weeks to follow play out a certain way. The macro top formation in question is a reverse symmetrical triangle, or ‘RST’ for short.

The premise of the pattern is that increasingly larger swings in price which create higher highs and higher lows marks a period of growing instability in the trend. The pattern has been under development since May of last year, which implies the move is going to be quite meaningful.

FAILED RALLY ATTEMPT AFTER PULLBACK IS KEY

Why price action since May has become key to a bearish outlook. These patterns, while often thought of as reversal patterns, can lead to strong continuations. That is, if after the initial pullback off the final high (May-June) the market can shrug off weakness and rally to a new high.

However, what we are seeing is the attempted rally fail quite significantly, making a run at multi-month lows. The failed rally provides a strong cue that the RST is bearish in nature, and that a material decline is underway.

How material? The first level of support is the bottom of the pattern down under 6900, but the measured move target based on the height of the formation points to another 1000 points on a break of support, or sub-6000.

FTSE WEEKLY CHART (RST PATTERN)

Keep an eye on how other major global markets are playing out, as this will impact this outlook. Just yesterday, we were discussing bearish potential in the U.S. indices and the possibility for a broad head-and-shoulders top in the DAX.

What does this mean for the shorter-minded trader? It means that even if you aren’t looking to hold for a major market rout, the path of least resistance is on the verge of becoming decisively down and with it a higher volatility regime. This information can be used for shaping short-term maneuvers.

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