The FTSE 100 tried to rally just a bit on Monday, but as you can see, we still have some work to do to the upside. At this point, it looks to me as if the 7200 level will continue to be crucial, and I have marked it on the chart. The 7200 level was the top of the most recent consolidation area, and at this point in time it looks as if the 50-day EMA is trying to reach towards that region.
“Market memory” should come into the picture at 7200, as it had been so resistant previously. In other words, there are a lot of shorts at that area that would love to get back out of the market and basically break even. The 50-day EMA approaching that level adds more credence, so at this point I think it is probably only a matter of time before you see some type of reaction. It is worth noting that the most recent action has been somewhat grinding, which is typical for a market that continues to try to go to the upside but might be just a little bit extended.
When I look at this chart, I think that the 50-day EMA itself might be supportive, but even if we were to break down below that level, there is a gap that is near the 7150 level that comes into the picture as well. I think by the time you get all of that put together; it is difficult to imagine a scenario in which we can break through that area easily. If we did do that, it would more than likely be a very negative turn of events and based upon the idea of a major “risk off” type of scenario.
Keep in mind that the FTSE 100 tends to be very risk-sensitive, and as long as money continues to flow into equities, it will most certainly flow into the FTSE itself. Furthermore, the Bank of England has kept up its loose monetary policy, so I think it makes sense that stocks should continue to see inflows when it comes to London. At this point, if we do not pull back but break above the highs of Friday, that would also be a signal to go long, perhaps reaching towards the 7400 level.
