Footsie Fortunes

THE stock market has started the year with very little price action. It fact it seems eerily quiet, possibly the quiet before the storm.

Last week we discussed the technical break out situation that had occurred in the FTSE 100. This break was on the upside, breaching an upward trend that has been running since the middle of last year. Having lifted 70 points above the break point, the market retraced its steps - as it so often does in these situations - to the break out level at 4450.

The fact the market closed a whisker above 4440 on Tuesday – it was 4440.1 – should be cause for relief. If the market trades without a close below 4440, we can be reassured that the break out was genuine and our target level of 4670-4690 should be achieved. If however the Footsie trades lower and closes below 4440, then the break out has failed and we would expect the market to retest our next support level at 4365; a further breach of which would see weakness to 4225.

But there are other factors to consider. You do not have to be the governor of the Bank of England to know how well the British pound and euro have been performing against the US dollar in recent weeks.

This is great news for those of you who spent the Christmas holidays in the United States, but not such good news for UK companies that export to the US. In recent months the pound has strengthened against the dollar by some 25%. With many companies' profit margins a fraction of that, you can easily appreciate the impact of such a currency fluctuation. This damage to the bottom line of many Footsie companies may well filter through as the pound heads towards that target level of $2.00 to the pound.

With the pound so strong, interest rate rises are becoming less pressing and the base rates could go on hold until we see the effect of this currency volatility on the UK economy. The fact that the UK's short term interest-rate futures showed an easing of 30 basis points (0.3%), suggests that interest rates are expected to rise only marginally this year and I've certainly noticed the cheap fixed-rate mortgages starting to reappear.

So why all this fundamental analysis? Because the FTSE 100 sits on such a critical technical pivotal level, the above fundamentals will probably be the catalyst for its initial direction.

To summarise: One eye on the currencies and interest rates and the other eye on the technical levels. One thing feels certain – the Footsie is not staying here for long.

Footsie Fortunes is written by Simon Brown of Quantigma - a firm specialising in tools for technical analysis. It is regulated by the Financial Services Authority. For information about courses in technical analysis, go to www.quantigma.com