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May correction looms for the FTSE 100

Article By: ,  Financial Analyst
May 1, 2015 3:28 PM

My reading of UK stock market sentiment is largely the same as it was in late March.

I moderately downplay the capability of the run-up to the UK election to seriously spook investors in FTSE 100 companies, partly due to the strong multinational character of the UK benchmark.

But the UK blue-chip market isn’t entirely immune to British currents.

Sterling has a visible impact.

However even the main exchange rate with the pound has provided a largely positive input to the UK stock market so far this year.

Cable tacked on about 4% in April, but remained short of highs of February and nowhere near cycle highs of July 2014.

This implied a tailwind for exporters and an additional fillip for consumption amid ‘zero’ UK inflation in March and April.

I agree that sterling will remain the main arena in which election-related market caution is reflected, underlining the balanced case for blue-chip stocks in May.

Essentially, sterling has not recently hindered the FTSE 100’s room on the upside.

However, there were signs that a correction had started as May got underway on Friday 1st.

Therefore, I read the FTSE’s comedown as more of a logical postscript to three consecutive monthly record highs than a reaction to the probably inconclusive UK election.

FTSE 100 chart using 10-day intervals

Key technical factors

  • Ascending wedge
  • Rising convergence tends to lead eventually to trend breaks
  • High/low trend convergence reaches ‘zero’ in mid-June
  • Percentage price oscillator may fall back toward range from late May
  • ‘Classic’ stochastic crossover
  • 7030-7090-encompassing many all-time highs seen in April, should cap gains in May
  • With February’s 6949 all-time high pierced late last month, and the trend likely to weaken further, I target 6855/6860 support sometime in May. If it breaks this support line, my next target is 6750.

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