FTSE 100

SELL 6,730.7 TARGET 6,045 STOP LOSS 6,825

The FTSE 100 continues to trace out a W-shaped wedge pattern, which dates back to the third week of September. Such a technical feature bodes ill, so while this special issue of Shares may flag the blue-chip index’s long-term fundamental attractions, the technicals suggest the benchmark is heading for a rough patch.

If this pattern is interpreted as a bearish Wolfe Wave then the FTSE 100 could rotate down to test the green line, which is derived by connecting points X and C. The broken red lines which apply the Wolfe Wave timing technique suggest the sell-off will complete by mid-May at 6,045.

Christmas has a special effect all of its own on the markets as investors collectively seek to avoid any unwelcome movements towards the end of the financial year. As a result short positions are typically closed out in the run up to the holiday season.

When you add in the annual New Year blizzard of ‘buys’, then the conditions are set for a ‘Santa Rally’, which occurred again last month. To gauge the market’s true tone, investors must now pay careful attention to the extent of the follow through.

Had sentiment truly been strong the rally would have persisted into the New Year. Instead, the index’s lacklustre performance since the start of January warns of a false dawn.

My previous call on the FTSE 100 was also bearish (see Chartist, Shares 25 Apr ’13) and although that position hits its stop loss, I believe the charts support a contrarian view.