Footsie Fortunes

DURING the past two weeks, the FTSE 100 index has traded above 4550 three times, but on each occasion has failed to hold such levels and closed well below this level. Why?

Technical analysts will often look at ?daily ranges‘ (bar chart) to gauge points of resistance and support and ?closes‘ (line graph) as a confirmation on whether a break-out has occurred. 4550 is a technical area of resistance for the FTSE 100 and until the price of the index actually closes above this 4550 level we will not consider that the index has broken to the upside, even though it has traded above 4550 during the trading day.

On the previous occasions the FTSE 100 index has ?knocked on the door‘ of this resistance line, the index has retraced its footsteps. The target, should the index fail to break through this wall of resistance, is our line of support, which currently comes in at the 4410-4430 area.

So we can use these support and resistance levels effectively as entry and exit signals for our trading. Currently the 4550-4570 area poses resistance for the index and, therefore, signals an area to take profits.

The reason I say ?take profits‘ as opposed to ?going short‘ is because the overall trend is still ?up‘ in the FTSE and I never encourage traders to trade against the trend. And should the index retrace back to the 4410-4430 area, our area of technical support, it will signal an area to ?buy‘, with a stop loss on a close below 4365.

A lot of emphasis in today‘s market is put on when to buy or sell a particular stock or index; however of equal if not greater importance, is when to get out of a position either for a profit or a loss.

This was not the case when trading commissions and fees were at a level where profitability rates had to be extremely high in order to make good money; however now commissions and fees are extremely low and in some cases, like spread betting, virtually zero.

Footise 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