UK100 – Bearish case building?

Nerves on the rise

The UK100 has struggled to push on over the last month, with nerves in the markets seemingly taking their toll on the rally.

We’ve seen a couple of pullbacks that appeared to indicate the index was vulnerable to a larger correction but each time it showed strong resilience and headed back towards the highs.

Recently though, the bearish case has been building. The index has broken below the 55/89-day SMA (again) and stayed there for several days. What’s more, it’s become an interesting area of resistance since the breakout.

Since then it has consolidated around this level rather than reversing quickly higher as it has previously. The consolidation alone is hardly an encouraging sign, rather a continuation signal that suggests further moves lower could be on the cards.

To back this up further, the index has found strong support around 7,000, a major psychological barrier but a recent rally off this made a lower high which could be an early sign of a descending triangle forming, a bearish pattern.

From a fundamental perspective, there’s plenty of downside risks appearing that appears to be driving the shift in sentiment. Higher inflation, slower growth, rising Covid cases and tighter monetary policy to name some. But there’s plenty more.

Perhaps we’ll soon forget about some of these and the fortunes of others will change but right now, a case not to be bullish is certainly building.

Which begs the question, how will we know if the markets have turned more bearish and how far will they fall. Both are difficult to answer but a break of 7,000 would certainly be one signal. A break of the 200/233-day SMA band around 6,800 another.

There is plenty that can happen that can improve the fortunes of stock markets. Central banks are the obvious one, a powerful one at that which for so long has kept investors buying the dips when the fundamentals don’t necessarily warrant it.

A delay on Fed tapering beyond the end of the year and investors may be back on board. But the coming months will certainly be an interesting test and there may be a few twists and turns along the way.

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