But note there’s the Prior Low at 5301 to overcome. The first solid resistance from old price action that the market has had to deal with. We are testing that level right now.

And, not far above, the impetus from the H&S pattern will peter out as the minimum target is reached.

The market is driving into a band of growing resistance.

DAILY DEC 09 CHART

As the market has approached the long run resistance at 5301, hesitation has been clear.

The bounce back from the recent sell-off has been spirited but notable for the falling volume.

We are genuinely impressed but cautious.

In the short term we need a clear and sustained breakthrough 5386 to get long again.

The Macro Trader’s view:

The rally in the FTSE that begun back in March of this year, suffered an unexpected setback last week when over two days the market dropped in excess of 250 points in reaction to an announcement by Dubai World that they sought to reschedule US$60.0B of debt due to mature during December.

At first, traders feared the announcement would lead to a debt default dragging the Dubai authorities down with it and through contagion, affect other economies just when global recovery seemed assured.

The main lenders to Dubai world were banks and among those UK banks have a reasonably large exposure. Traders worried that this potential new source of bad debt, would affect lending to other business entities and derail the recovery or worse still force a major bank into bankruptcy.

Fears were somewhat assuaged over the weekend when Abu Dhabi appeared to offer support to the state of the UAE and traders anxiously awaited the start of the new trading week to see how the Dubai authorities would handle the crisis.

In the event, they effectively washed their hands of the whole affair and for a brief period the worst case scenario looked set to unfold, but it didn’t. The UAE Central Bank offered emergency liquidity, Dubai World announced it sought only to renegotiate its debt not renege on it, and the financial world breathed a sigh of relief.

The whole affair had proved no more than a storm in a tea cup and even if default had occurred, there is already substantial government support in place internationally for the banking industry, which would have prevented any major bank from going under.

Now equity markets and the FTSE in particular are back focused squarely on the economic outlook for the major economies. While the route back to a strong self-sustaining recovery is still fraught with risks, data continues to indicate that recovery remains on track. Indeed, in the US the Fed’s Beige Book released yesterday evening said 8/12 Federal reserve districts showed further modest improvement.

Moreover, policymakers have again begun to talk of the need for policy to be pre-emptive.

So last week’s sell-off in the FTSE was a correction in what is shaping up to be a solid bull market. It was a correction that was probably due and any one of a number of negative news stories could have brought it on. It just happened to be Dubai grating on nerves still raw after the worst financial crisis in living memory. The market looks set to advance further.

Mark Sturdy
John Lewis

Seven Days Ahead
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Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level technical and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

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