Where Next for The FTSE?

I was just browsing through some charts and came across the FTSE 100 Index. Although I focus on Forex, every now and then I take a look at the major indices around the world to see what’s next for the global stock market. Also when you look at the bull run we’ve had in the major global indices you are left with the question of “how long can this continue?” How long can stock markets continue to rocket up on the back of a shaky global economy? When will the stock market bubble finally come to an end?

Along Came The Dow:

The chart below is a monthly chart of the Dow Jones Index showing an incredibly strong trend from 2009 until now. That’s 6 years of aggressive growth! I remember watching price plummet to hit rock bottom in 2009 and never would I have imagined that it would be at all time highs this year:

The main thing to observe from the above chart is that a trend can last for many years and while it remains intact then it’s best to trade in the direction of that overall trend and stay in for as long as possible. The second thing is that every move up will eventually have a move down, and sooner or later the market will turn and head down for a couple of years or so before resuming it’s upward trend.

The Chart below shows the Dow Jones over an 85 year period:

Imagine you bought shares in 1985 when the Dow Jones was around the 1,000 mark! Just by doing nothing other than holding on to your investments, those shares would now be worth 18 times what they were worth at the time you purchased them! And that’s despite two major market crashes!

Since the overall market always goes up in the long run then the sensible thing to do is to identify when the market is correcting and buy heavily when we see a market bottom like what happened in 2009. At a time when everyone was focusing on the doom and gloom, savvy investors were quietly investing in the stock market.

Why Does The Market Always Go Up?

But why must the market always go up? Could there every be a time when it moves down for a lengthy period of time and reverse this current uptrend once and for all? Well I would say such a scenario is almost impossible as long as our current western economic models remain intact. What do I mean? What drives the market higher is higher share prices and what drives share prices higher is companies making more and more profits. How do companies make more profits? Through expansion into new markets. Looking at trends in global population statistics we see that there are more and more nations becoming industrialised and developing nations are becoming richer. The population of the middle classes is increasing which brings with it new appetites for western goods and products. This allows western companies to sell into these new territories and access new middle classes who are able to afford their goods which in turn pushes up their profits and share price. So as long as these global trends continue then western companies will continue to increase their share price.

Another factor is that western governments have proved they are always ready and willing to prop up their economies through quantitative easing policies as we have seen over the last few years. This was not the case with previous downturns where companies were allowed to collapse and the economy returned to normal more organically. A lot of governments set the precedent that if we ever enter a downturn like that experienced during the credit crunch then they will step in and pump whatever amount of money is needed into the economy to keep it going. This will effectively make the impact of any future recession much softer in the same way that lending money to a person who is broke until they find a job cushions the impact of financial hardship on the person.

And now for the FTSE

The Dow Jones and the S&P500 lead most global indices so it is very rare for them to be rallying and other indices to be falling. The world economy is much more closely knit now than ever before so if there is a boom in one part of the world then it will impact everywhere else. The US economy is the world’s largest economy and although China is creeping up to take that title fast, it will be a while until that happens. So for now boom and bust cycles start off in the USA and ripple across to everywhere else but some indices will underperform or outperform these indices. Take the FTSE 100 for example, this has seen it’s value more than double from 3,400 to 7,100 since 2009.

FTSE 100 Monthly Chart:

We can see from the chart that price has been at it’s current high price a couple of other times in the past – first in 1999-2000 during the dot com bubble, and then during 2007-2008 during the credit bubble. Now we have the quantitative easing bubble and price is floating just below the 7,000 level. The red lines represent the upper and lower boundary of the congestion that price is currently in. What’s next for the index? Well it is at a previous turning point and therefore we need to entertain the possibility of price turning from this point and heading south for quite some time. From a technical perspective, this area is a selling zone as sellers have turned up on two occasions historically to turn price down. During both of those times we were in a recession which was produced by a bubble – could this be the third bubble unfolding? Time will tell but we could look at price breaking below the lower red line which is support at 6,100 as a sign of the FTSE turning bearish.

The 6,000 – 6,100 Level…

The 6,000 to 6,100 level is worth watching closely because if price breaks below this level and stays below it then we will be in bearish territory. We can also see that price broke above 7,000 (the upper red line) but failed to stay above it and turned aggressively down – this is a sign of weakness. If this weakness is followed by a break below 6,100 then it would be confirmation of price heading down to 5,000 or 4,000 (the next support levels).

The other scenario is if price heads back up above 7,100 level again, in which case this would tell us that the correction was short lived and price has now resumed it’s upward trend. The safest thing to do in such a case is to wait for price to fly past 7,100 and wait for a retracement before taking a trade long. This avoids you getting stopped out or getting caught out in the whiplash like what happened when price got above 7,000 recently.

Now it’s just a waiting game…6,000 or 7,000 – which one will be broken first? Bets please………