Footsie Fortunes

THE recent round of official economic releases pose several questions on whether short-term economic growth is actually good for the stock market.

The conundrum with inflation, is, if it is too high the Bank of England will need to raise rates significantly, which may well draw money away from the market and onto deposit, even though the inflation may represent good economic growth. At the same time, these higher rates would further fuel the pound making many UK companies less competitive overseas, especially in the US.

On the other hand, lower inflation will keep interest rates low, taking some pressure off the strong pound resulting in long-term investors keeping there money in equities.

The consensus among many economists is that growth will be steady, not rampant, resulting in steady rise in the stock market.

But what does technical analysis tells us about the FTSE 100? In the short term, the technicals suggest loss of momentum and pending weakness in the market. We have a double top forming.

A double top is formed by a peak, a valley, a second peak that stops about the same level as the first peak and finally a drop in prices that falls below the previous valley.

The third and fourth week of December saw an impressive rally with progressive gains right through to the new year, where the market peaked at 4525 before retracing to trough at 4430, in the second week of the year.

The third week saw another rally, which peaked at 4530, before retracing again to 4440 on Friday and closing at 4460. So, following the definition of the double top, we have completed all, except the breach of the valley at 4430.

On Monday of this week, the FTSE had another look at the 4430 level before bouncing up during Tuesday‘s trading, only to fall back to that 4430/40 area, which is now becoming a level of significant resistance.

I always say never to pre-empt a technical formation – just react once it is fully formed. Therefore, we must keep an eye on the 4430 level, which is only 17 points below Tuesday‘s close and so deserves close attention.

If we close convincingly below 4430, then the double top is formed and we can then expect immediate weakness down to 4330.

To summarise, look for a close below 4430, which would signal a fall of 100 points to 4330. If 4430 is not breached, then the Footsie will gain firmer footing before testing the highs experienced last week above 4500.

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. To register for a free options seminar in London on 28 January, visit www.quantigma.com.