Interactive Investor

Chart of the week: FTSE 100 trades with heavy resistance

5th January 2021 14:46

John Burford from interactive investor

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Are the pundits right that the vaccine roll-out means normality by Q3?

This is the time of the year when pundits come out of the woodwork and prognosticate on their outlook for shares and the economy for the new year. And they have been universally confident for gains – some major – and think the vaccine roll-out will practically guarantee a ‘return to normal’ by Q2 or Q3 at the latest.

The rationale for this view is compelling. Savings rates during lockdowns have exploded and this ‘wall of cash’ will move into the ‘cheap’ UK stock market and into a rush of consumer spending from the pent-up demand. When the floodgates are opened as more people receive the vaccine and move out of house arrest, a boom will result.

While that may or may not happen, the ‘wall of money’ theory is utterly false. When someone deploys cash from savings to buy a share, the seller of that share adds the very same amount (less any commissions) to his cash pile. Whatever ‘cash pile’ exists remains constant.

As I have repeatedly shown in these articles, the basic reason why a share price advances is because the buyer and the seller agree that it should and the trade takes place. Nothing more. A bullish sentiment produces rising prices (and vice versa).

So how did the first day of trading kick off this supposedly bullish outlook? Going into the last day of trading, the FTSE 100 fell off as sterling surged. Despite the ‘wall of money’ supposedly piling into shares yesterday, the FTSE has not yet moved above last Tuesday’s high of 6,678. It remains within the heavy bank of resistance I have identified previously:

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

So my bearish scenario remains in place. Of course, we could see a little more upside while the residual buying is mopped up, but to me, odds favour a bear trend to come.

Also, it is noteworthy that the vast majority of mainstream commentators are very bullish – I have seen one prominent guru calling for “five figures on the FTSE 100”. That is an advance of 50% from current levels. Hmm.

But remember, when everyone believes something will definitely happen, it rarely does.

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.

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