This article was written exclusively for Investing.com.
Global stocks have surged back higher this week, with the FTSE reaching a new high for the year. The index has not peaked above last year’s high yet, so in that regard it is still miles behind its US and European counterparts. It clearly has some catching up to do, and this week’s break out suggests it may go on to close the gap down a little at least.
The FTSE is a commodity-heavy index, so the big gains we have seen for crude oil and copper prices have helped energy stocks and miners. Meanwhile, banks have risen along with yields in recent times, as investors have become optimistic about a steady economic recovery and look forward to mild policy tightening from the Bank of England. Earnings have been decent. Had it not been for worries over inflation and supply-chain disruptions, we may have already seen record highs for the FTSE given accommodative central bank policies around the world and a sharp economic recovery from the pandemic.
As mentioned, the index could be on the verge of a bigger recovery, as this technical development suggests:
The FTSE may have just resolved a 6-month consolidation where it had been trading sideways within about 360 points. The index has broken out and should it hold the breakout then we may see a significant move to the upside, simply because of the length of time the bulls and bears had battled it out for the bulk of this year. As a minimum, I reckon the index will now rise a further 360 points or so, which is equivalent to the height of the prior consolidation range.
But it could easily go on to reach much higher levels, with the 2020 peak at 7690 and the all-time high that was hit in 2018 at 7903 not being too out of sight.
While the breakout is clearly bullish, especially as it is in the direction of the long-term trend (e.g. 200-day average is pointing higher), there is the possibility we may see short-term pullbacks here and there. The markets rarely rise without a pause. If the FTSE does dip, then the most important short-term support level to watch is at 7150, which is the base of this week’s breakout. Ideally, we wouldn’t like to see the FTSE go back deeper into the prior consolidation range as this would point to a fake or a weak breakout attempt.