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FTSE 100 Should Move Higher But Upside Is Limited

ByThierry Laduguie
Published 08/12/2014, 07:58
UK100
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The FTSE 100 closed strong on Friday boosted by the nonfarm payrolls report which came in higher than expected. Payrolls rose by 321,000 in November, way above the 230,000 estimated. This points to a strengthening US economy, the bad news however is that interest rates could rise sooner than previously thought.

This explains why the stock market has limited upside potential in the short term, we know that the US economy is doing well and we know interest rates will go up in the New Year. Higher interest rates will have a negative impact on the economy therefore investors may want to take profits in December before the first rate hike is announced.

So far the market has been supported by the ECB and China's decisions to add more stimulus. Unlike the US, these countries are suffering from an economic slowdown. The latest data from China confirms this. Export growth is slowing which means the world is buying less from China and this is having a negative impact on imports. This is why China's imports contracted sharply in November.

The FTSE rallied strongly on Friday, the index is back above the 200-day moving average (resistance area). The price action suggests that the index will make a new high above 6773.5 but upside is limited because the area above the 200-day moving average is resistance, the maximum retracement level is 6905 (a second wave cannot retrace more than the first wave) and a large selection of blue chips, in particular mining and oil stocks, are lagging the FTSE. The bottom line is that too many blue chips are already in a downtrend and they are not following the FTSE higher which is a scenario associated with a counter trend rally.

FTSE 100: 2 Hourly Chart

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