Interactive Investor

Chart of the week: has new FTSE 100 crash begun?

21st December 2020 13:08

John Burford from interactive investor

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A new Covid strain, chaos at ports and no EU trade deal have triggered fresh selling of equities.

This is my final COTW for 2020 and I would like to wish you all a very Happy Christmas and a prosperous New Year.

As forecast, FTSE is falling hard off my 6,600 target high

In my Chart of the Week of 7 December, I explained that the current bullish enthusiasm for ‘cheap’ UK shares had propelled the index to my long-standing target at the 6,600 level. I added that this was likely to be at the peak of bullishness, not the start of a ‘new era’ of stock gains as thoughts of a vaccine-induced ‘return-to-normal’ scenario were widespread.

And this morning, with UK/EU trade in goods being disrupted and no sign of a Brexit trade deal yet, stocks are following my road map and falling hard.

This is what I wrote three weeks ago: “I believe we are now at a major crossroads in the FTSE 100 index.”  I have no reason to alter my stance – and, in fact, I have become even more bearish and expect 2021 to kick off in negative territory.

Here is the chart of the FTSE 100 I showed last time:

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

…and here is the updated position:

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

The huge resistance at the 6,600 area has been very effective at repelling advances, and today we are seeing the first stage of a strong wave 3 decline. This should take the index to below the ‘b’ wave low at 5,500 and then the red wave 1 Corona Crash low at 4,800 next year.

As I wrote earlier this month: “Note the large momentum divergence as the ‘c’ wave hits the resistance zone as the buying pressure is actually weakening in the face of the current bullish exuberance. That is a bearish signal.”

I advised caution then and I advise it again now. Investors should consider taking at least some of the profits built up in last year’s stunning gains, especially in the tech sector. If my road map is correct, I expect 2021 to be a ‘hard down’ year.

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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