28 Jun 2010
Trading in the real world: FTSE 100

Hello and welcome to CantosCharts Masterclass. I'm Sandy Jadeja, Chief Technical Analyst for City Index.

Well, we're continuing our series of technical analysis and how to use chart patterns and various technical indicators. But as always, this is simply for information and educational purposes only.

Over the last few weeks we've talked about various technical indicators and chart patterns and what we're going to do today is to see if we can wrap everything up in a very simple lesson on how to look at the current position of the market.

Now, I want to use technical analysis in terms of indicators as well as chart patterns, but I also want you to make a decision as to what you think is going to happen next.

So, we're going to take a look at moving averages, support and resistance and also candlesticks, so we'll use a combination of these three elements to see if we can decide on what to do next in the market.

Now, right now, we're looking at a FTSE 100 Index. This is the weekly chart. The first thing I want you to do is to see what stands out. What is the most obvious thing? Well, at the moment, right now, we can see that the index is trading below its 20 week moving average, so is that bullish or bearish? Technically speaking, that should be considered bearish. Also, we notice that the recent low of 5,033 has also been broken, so what we should be doing right now is waiting for a lower high and a continuation towards the downside. The key upside resistance level is of course the 5,833 and that's the April high.

So, if we add on another piece of element, the green line that you see, what's important about this? Well in the past lessons I've talked about the importance of round numbers and this green line over here is actually at the 5,000 level, so we can see just by a glance that the FTSE has tested as a support base the 5,000 level on several occasions, so that's another piece of information that we should be observing.

Now, also, notice how many attempts the FTSE actually had in trying to break below this 5,000 level. We've had one, two, three, four attempts on the weekly chart, but on a daily, it would have been a few more, so what does that suggest? Well initially, we can say that the FTSE has tried to break towards the downside, but the 5,000 psychological level has held the FTSE up. So that's quite important because we're almost approaching that level as we speak right now. The question is, are we going to hold that level?

The thing is in technical analysis, when a market attempts to break or even break above a level and it has several attempts, the odds increase of that breaking through. So if we approach this 5,000 level and it doesn't hold, the odds suggest that we're likely to fall below this level and go to lower support areas.

What other information do we have? I've now changed this to a candlestick chart because we've also covered the elements of candlesticks. What is the thing that stands out right now? In the box that I've identified, the current candle, the red candle, is suggesting that we have a bearish move. In other words, it's called an engulfing pattern. So the current candle is enclosing the previous white bar candle suggesting that right now the move is towards the downside and it's quite a significant one. So that's another piece of important information.

But also notice how sharp these red moves were towards the downside and they were also larger than the previous move that we had experienced before. That's also quite bearish.

Now, there's another important piece of information and that right now is the trading range. In other words, we're still looking at the weekly chart, but we can see that for several weeks, the index has been consolidating between 4,341 on the upside and 4,898 on the downside and that is signified by both the black lines. So what we want to see is the market for the bears break below the 4,898 and if the bulls are going to come back into play, we'd like to see the market break above 5,341 with an attempt to go back towards the 5,833 area.

What other pieces of information have I given you here? Well you'll see that dotted blue line. Now that blue line there is pretty much where we could say the next support level would be and that is the previous high 4,520. In technical analysis, previous highs can become new support.

So in this example here, if the market breaks below 4,898, it would suggest that we could be looking towards 4,520 as a support area. Now coincidentally, we also have the range which is basically 443 points. If we subtract 443 points from 4,898, it provides us with another support area just below the blue line coming in at 4,445, so we already have a confluence of two price targets suggesting that would be a good support area. So if the FTSE does break down below 4,898, we already have a price target in mind.

Now, this is the daily chart because we want to switch the two timeframes. This is immediate. This is right now. We can see straight away that for the last three bars, the index has been moving towards the downside, so that's quite bearish, but it's not as bearish as we've seen some of the previous moves on the shorter term chart. But again, another instrument that we've looked at in terms of technical analysis is a parabolic SAR and at the moment the index hasn't broken below the parabolic SAR, so that's saying that if we break below 5,050, it would suggest that breaking the SAR, there's a higher degree of odds that the market could move towards the downside.

So there are various elements pointing towards a bearish scenario. The key things to really remember is the market below or above the 20 period moving average, are there any key support or resistance levels nearby as we approach these levels and what is the current pattern telling us? In other words, what is the price bar right now telling us and are we above or below the parabolic SAR? These questions should enable you to come up with the correct answer and give you a state of play on the market.

Now of course, this is simply for illustrative purposes. I'm not saying that you should take a bearish position. That is something that you need to decide on. But of course we've seen various clues as to what the market could be doing right now.

In the next lesson we'll take a look at another market using technical analysis. In the meantime, have a great trading week. This is Sandy Jadeja.