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FTSE 100 (UKX)

Since the mid-July high of 6,754, the FTSE 100 index has dropped by 21% to the late-January intra-day low of 5,338. This has satisfied the 38.2% retracement of the 2003-2007 bull move and the target derived from the large top pattern formed during much of 2007. When last discussed, it was felt that a bear flag pattern was forming that could send the index down toward the 50% retracement level at 5,008. But nothing should be taken for granted.

The index then fell toward a retest of the January low. But, despite raised volume, crucially while a new close low was posted, the index did not breach the intra-day low, so maybe the bears need to be cautioned, mainly because, on a closing price basis, bullish MACD and RSI divergence signal the potential for a base forming. Also, the recent low was by a gapped down move then a gapped up move after the Easter break. The inference is that while any renewed weakness does not breach 5,414 on a close basis, further gains that punch above the 50-day average currently 5,800 could retest the end-February high at 6,104, near the level of the bear trend line drawn off the closing highs of last autumn. Such a move would be key to any longer-term bullish possibilities.

Euro/pound exchange rate

The pound is down some 15% against the euro in nine months. Perhaps this will help stem the flow of emigrating Brits. Currency is also the single biggest influence on the performance of foreign investments and a declining pound can be an advantage to those who already have foreign holdings or earnings, as when repatriated they buy more pounds, inflating sterling returns. A falling pound can also help exporters, and can attract foreign investors into the UK. However, as a country with a yawning trade imbalance it means higher import prices and so higher inflation, which seems to necessitate raising interest rates in the longer term – a brake on the economy. So calling this rate is crucial.

The vertical width projection following the breakout from the four-year horizontal channel signalled a move of some 1,190 basis points to ?1.29, a level also alluded to by the bear flag mid-move pattern formed at the start of 2008. This level has been passed with the intra-day low of 1.2612 . Importantly the rate is at the low of its current bear channel and shows positive momentum divergence from oversold levels. The downtrend would surely be over if a move above ?1.3150 occured, breaking the 50-day average that has capped the upside in the decline and the channel upper return line. Adventurers may now be seeing a selling climax and it might just be time to start to buy the pound.