Chart of the week: Fear of FTSE 100 tumble grows

Is the FTSE poised for another tumble?

For the Chart of the Week, I usually try to find shares that appear ready to advance for long-only portfolios. But search as I may, I am coming up empty-handed this week. In fact, odds are now switching to the view that the FTSE has started a downturn that should result in lower values for many leading issues in coming months.

I have already pointed to UK bank shares that are already in solid bear markets - and the financial sector is a pivotal one for the economy as well as for many other share values.

Today's economy relies heavily on the dominant financial engineering that low interest rates - engineered by central banks - have encouraged. Given that, I have been on high alert for a turn down in the FTSE 100 index, led by the banks.

In my coverage on 18 September, I asked then:"Is the FTSE breaking down?". The FTSE was trading at the 7,300 area, and this is the chart I showed:

I had a lovely wedge connecting the recent highs and lows and counted five waves to the June high at 7,600 in an 'overshoot'. Remember, overshoots can often foretell a trend reversal when it comes after a lengthy bull (or bear) trend.

And with the break of the lower wedge line, I had my first solid clue that the trend of the market was changing from up to down.

But, as usual, this was not enough for me to conclude the market would shoot straight down. Animal spirits were still running pretty hot. This was the action close-up to 18 September:

That was very whippy action off the June high and very tricky to trade. But the move off the high was in three waves to date. That allowed the possibility for a rally back towards the lower wedge line in another kiss attempt. Stock indexes usually do not display a 'spike' top. They generally roll over after several scary down/up sequences.

And here is the updated daily chart:

From the 18 September low, the market did indeed rally to attempt another kiss, but the two attempts failed and, crucially, the rally was a clear five-up with a huge momentum divergence at Tuesday's high of 7,582 - an 18-pip miss on the June 7,600 high (which should be an important miss).

But what is the other major UK index - that of higher beta shares - the FTSE 250 showing? After all, this is a more UK-focused index than is the FTSE 100, which holds many big overseas commodity and energy operations. The 250 is considered to be a more risk-on index than the relatively stolid 100.

Here is the FTSE 250 daily with chart action this year:

I have a really good trading channel between my blue tramlines and a very clear large scale five-up. Also, the rally off the September low is a clear five-up - just as in the FTSE 100 chart. And there is a huge momentum divergence at the high, which I can now label as the final high.

Chartists will love the upward thrust out of the wedge-shaped purple wave 4 low in wave 5 - these are usually reversed quickly, and this one is conforming to this rule nicely.

Recall the very long range monthly FTSE 100 chart I showed in September:

I noted then that the previous all-time high was set back in 1999. In the years of massive QE stimulus, the FTSE has only managed a gain of about 8.4% to the recent 7,600 high. That's a pathetic result compared with the US indexes. It smacks of inherent weakness.

And if we have seen the high, we will have a double top at the 7,600 level between the June and November highs.

The lows on this chart are at the 3,400 area - over 50% less than current levels.

Dare I suggest this becomes a serious target when the downtrend gets underway?

I have a feeling I shall be covering a lot more shares to short in the near-future.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.