UK100 – Breakout or correction imminent?

It’s been a good run for the index

The UK100 has been on a good run in recent weeks, in keeping with the broader trend in stock markets that have reacted very positively to a strong third-quarter earnings season.

This followed an adjustment prior to the start of the season as investors started pricing in earlier and earlier rate hikes, not to mention more of them over the next couple of years, in response to higher inflation signals.

Broadly speaking, they find themselves caught between two opposing forces at the moment. Earnings euphoria and inflation fear which is why in many markets we’re only seeing marginal moves and in some, simply treading water and waiting for the next signal.

So for the FTSE to continue making steady, albeit small gains has been encouraging. It has recently run into resistance though at 7,400 which is a notable historic level of support and resistance, as the big round numbers so often are. It was particularly the case in the late summer to early winter period of 2019 when it really struggled to break above here. We all remember what came shortly after.

For the first time since the pandemic, it’s trying to break back above here again but it’s struggling once more. The MACD and stochastic show it was struggling for momentum in the days leading up to the level and we appear to have since seen some profit-taking.

This begs the question, is a breakout imminent or are we facing a deeper correction after a decent run? That will depend on how the index responds around 7,300-7,320.

Not only is this the next big number down, but it also coincides with the 55/89-period SMA band on the 4-hour chart that has tracked the rally higher, offering support on any pullbacks. A break below here could signal a deeper correction.

A rebound off here could trigger another run at 7,400. If this happens, the momentum indicators will be key. And a failure to make a new high will be another red flag as far as the rally is concerned.

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