Broken Trend Channel
The FTSE 100 index has broken decisively out of the uptrend channel it established back in December last year (red circle). The long-term uptrend established after in the wake of the March 09 low (green dotted line) should provide strong support at around 5,000.
The index top of UK businesses has also completed a so-called death cross (circled) – a bearish technical signal that can precede a big drop in the market. The death cross occurs when the 50-day moving average (blue line) falls and crosses below the 200-day moving average (red line).
Head and Shoulders Top
The recent decline in the FTSE has also completed a bearish topping pattern known as a Head and Shoulders Top. A Head and Shoulders top is a chart pattern that forms after an uptrend has become exhausted and its completion marks a trend reversal.
The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The low point of each peak can be connected to form support, or a neckline. As its name implies, the Head and Shoulders reversal pattern is made up of a left shoulder, a head, a right shoulder, and a neckline. NB: The pattern is best seen on a chart of the S&P 500 – to whose tune the FTSE very much dances.
As the chart below shows, the FTSEs decline through 5700 traced out the right shoulder and established a clear neckline (upper blue line). After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the head. This distance is then subtracted from the neckline to reach a price target. This gives the FTSE a downside target of around 5,100 which was established as support in August 2010 (lower blue line).
There are all sorts of other numbers that can be used as a downside target such as the 4,800 area where the FTSE made the low in July 2010, the 4,100 low made in July 2009 or 3,512.10 (closing price) which was reached in March 2009.
The determining factor is simply how bad western governments let things get before they fire up the printing presses and begin more QE?