Footsie Fortunes

I BELIEVE the markets are relatively efficient, in that all the available information about a company is reflected in its stock price. However, human sentiment has a big influence on the price of a stock.

There is no better example of this than the 'tech bubble' where many of us witnessed stocks go from £1 up to £10 and then all the way back down to £1 pound again yet without any significant change in the fundamental situation. In fact most of the price change was due to a shift in sentiment.

Look at last week's trading in the FTSE 100. The market opened on Monday of last week at around 4400 and closed seven trading days later at around 4400, unchanged on the period. In fact, if you had been away from the market for that period you could have been forgiven for thinking that nothing at all had happened. Admittedly it has been a quiet period, but the index still traded up and down every day. Why is this when nothing fundamental changed on a day-to-day basis to cause the daily fluctuations in the index? Answer: Human sentiment and the different aims of traders.

For example, short term technical traders may have been betting on a fall on Monday, following the confirmation of a 'double top' the previous week (see last week's column). That helped drive the price of the Footsie down towards 4350, before institutions stepped in to buy ahead of the Bank of England interest rate announcement on Thursday. That pushed the index back up to the 4400 level. These inefficiencies caused by human behaviour create opportunities and I believe the best way to profit from these opportunities is using technical analysis.

So talking in terms of sentiment and using charting techniques, what should we expect from the FTSE 100 now? In terms of definite patterns, the market is technically tired having lost significant forward momentum over the last two weeks. Nervousness about higher interest rates and the effect of a strong pound on UK companies has undoubtedly taken focus away from UK stocks.

With a short-term objective of 4330 and then 4250, the market has further to fall back before we should think about adding to our portfolios.

So the key areas to watch for the next few days are initially the 4330-4360 area, which present a good buying opportunity, however further retracement to 4250 is also likely.

On the upside we would need to see the FTSE 100 close above 4500 to regenerate the upward momentum, which we saw in January.

Footsie Fortunes is written by Simon Brown of Quantigma, a firm specialising in tools for charting and technical analysis. Go to www.quantigma.com to view the free seminar program and further educational articles