Interactive Investor

Chart of the week: spelling out the risk of a FTSE 100 crash

11th October 2022 08:03

John Burford from interactive investor

Analyst John Burford’s bearish view has proved correct up to now. Will his fear that we could be about to witness an even bigger crash be right too?

Is there anywhere to hide from the falling FTSE 100?

In my latest take on the FTSE 100 index on 26 September, I wrote:

In my last COTW on the FTSE 100 index on 30 August, my strong forecast was for a period of strong selling and the index to begin a hard down phase provided the recent high was not exceeded. This is what I wrote then: “If the current bounce terminates around here (latest 7,480), I expect to see a very hard down phase into September, which is usually a poor month for equities.”

And since then, my roadmap is being followed highly accurately, with the current market trading at 6,930 as I write. Thus, the senior UK index is trending lower in accordance with my forecast for a wave 3 of 3 of 3 down. Recall, these are the longest and strongest on the board, and we are at the early stages of this wave.

This was the daily chart I featured in my post of 26 September:

Past performance is not a guide to future performance.

And with the clear break of the lower tramline, odds very much favour a strong collapse in wave 3 of 3 of 3. My first target is the 6,800 area which also happens to lie on major long-term support marked by several previous lows.

Thus, a sharp break of 6,800 should kick off a major collapse.

In my comment above that 'September is usually a poor month for equities', I should have added that October is similar - but a lot more so. Many of history's major crashes have occurred in this month – and I believe we shall see another one this year – and it could possibly be the greatest ever.

With my firmly bearish stance, I am unable to recommend many investments to purchase – except one that I mentioned last time, the Xtrackers FTSE 100 Short Daily Swap ETF – and here is the latest chart:

Past performance is not a guide to future performance.

And since last time, the market has broken above my upper tramline to strongly suggest the trend has now turned up.

I have shown the Relative Strength Index (RSI) which is a well-regarded momentum oscillator that measures the relative speed and strength of recent market moves. A reading under 30 indicates 'oversold' while a reading above 70 indicated 'overbought' in the near term. And a positive divergence can highlight a change in trend – as here.

Previously, the momentum trended lower, with RSI posting consistently weak readings denoting a bear market as the FTSE100 advanced to my wave 2 high – until recently.

If correct, we shall soon see a strong push above the upper tramline and head towards my first target around £4.20 with much higher potential.

John Burford is a freelance contributor and not a direct employee of interactive investor.

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