Overextended FTSE requires cautious approach

With the move approaching a key 78.6% Fibonacci retracement, there are further technical reasons to be wary on the gains.

As well as the Fib level, there is further resistance to consider, including the reverse trendline from the 2011-2014 swing lows, horizontal resistance (July 2015) and the MACD crossover into bearish momentum. There is evidence of an ending wedge formation, coupled with bearish divergence on the daily chart.

A break of the bottom of the wedge would trigger a sell signal, although we would prefer to see a close below this supportive trendline, or at least a break of 6660 before actively shorting. We would see this merely as a correction, as the reverse head-and-shoulders formation continues to play out.

Initially, a tight stop can be placed on the 6660 trigger, and once a close below this level is confirmed, the hard stop can be introduced.

Price action previously formed a reverse head-and-shoulders formation, which is targeting 7400, so any corrections may be short-lived.

ParametersEntry: sell UK100.I on a break and close below 6660.

Stop: a break back above the recent highs (currently 6760).

Target: 6500 and 6360  (Fibonacci retracements and support levels).

Time horizon: 4-6 weeks.

Reverse trend line (weekly)

Reverse head-and-shoulders formation (weekly)

Ending wedge and bearish divergence

Fibonacci retracements