Chart of the week: Will 6,900 represent a major high for FTSE 100?

Thoughts of imminent collapse have been parked after an impressive rally since December, but are we in a long-term bear trend? Analyst John Burford gives his view.

After the tumultuous December in stockmarkets, I thought I would assess the current position in the FTSE 100 index.  The December Dip (or the US Tech Wreck, as some may call it) produced an avalanche of advice in the mainstream media to 'Batten down the hatches', and 'Don't panic', and even 'Buy the Dip'.

But was that wise advice for UK shares?  After all, it is the default position of the perma-bulls no matter what headwinds the market is facing (and there are plenty, as always).  No, it is far safer to join the herd and stay with the usual buy-and-hold strategy.  

But what if we truly are in a genuine bear market where a buy-and-hold policy would be disastrous?

Every so often I like to go back to the long-range charts to see if there is any effective trend working.

Source: interactive investor  Past performance is not a guide to future performance

This is the 10-year rally off the 2009 lows and the advance has been hesitant to say the least.  One advance after another has been met with savage declines, and there are five clear waves to the recent 7,900 high.

But what is remarkable is that the highs all line up on the upper blue trendline (resistance), while the lows all line up on its trendline (support).  And the entire pattern is an expanding triangle – a relatively rare occurrence.

Another remarkable feature is that there are five clear waves to the 7,900 high, which is necessary to consider the pattern complete.

Thus, I have confidence that the 6,900 level will represent a major high and the trend is now down.

To get a handle on the short-term gyrations, here is the daily chart:

Source: interactive investor  Past performance is not a guide to future performance

The decline off the 7,900 high has travelled inside the trading channel between my pink tramlines. The lower line is especially strong as support as it possesses multiple very accurate touch points.  But note that last week’s rally made an accurate hit on the upper resistance line and is currently bouncing down off it.

And according to my trading rules, that was an ideal point to enter short trades since the main trend is down.

So, what could spoil this bearish picture? Well, a strong push above the upper tramline would certainly delay any thoughts of an imminent collapse, but would not in itself change the long-term bear trend.

Odds are the bear trend remains in place, subject to possible decent counter-trend rallies.

For more information about Tramline Traders, or to take a three-week free trial, go to  www.tramlinetraders.com. 

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.