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FTSE 100 (UKX)

Over recent weeks the UK’s bellwether index has attempted to mount a recovery following the sharp sell off that greeted the new year. However, last week the rise appeared to have run out of steam as it hit resistance from the ‘neckline’ of the large complex double top pattern that has formed during much of last year and also from its 50-day average. This ‘recovery’ can now be seen to be a flag formation, which typically forms at the halfway point of a move. If this interpretation is correct we must expect a further sell off of similar proportion to the December to mid-January one, ie something approaching 14% that would take the index down to around 5,018. Of course the top pattern should not be forgotten for it too suggests a target of 5,420. Looking at the big picture, it is interesting to note that on a closing quote basis, the Fibonacci retracement levels of the grand bull trend from March 2003 to July 2007 come in at 5,414 for the 38.2% level and 5,008 for the 50%. The coincidence of the pattern objectives and the retracement levels adds weight to their credence and would give the current bear trend proportionality in respect of the preceding long bull one. Bulls cannot be expected to raise a cheer unless the close on 26 February at 6,087 is supplanted and the neckline properly breached.

Dow Jones Industrial (DJI)

As expected and discussed here previously, this week’s chart confirms that the US index has failed to climb back above the long-term bull trend line on a close basis, despite it having attempted to recover from the last sharp sell off that was seen between late December and mid-January. In doing so it seems to have formed a pennant that gives a target of approximately 10,800. Before this level can be achieved however, we must see a successful break of support at and a close below 11,675 which marks the May 2006 high and on an intra-day basis arrested the previous January fall. Also key will be testing of the triple top pattern target, which for closes comes in nearby at 11,506. Last week’s test of resistance from the 50-day average at 12,687 and subsequent rotation to losses signalled the reticence of the bulls to make an attempt on the triple top ‘neckline’ now standing at 12,860 and unless fresh strength can achieve a closing break above this level then look for at least a further drop of 1300 points and if the pennant plays out a move close to the 50% retracement of the October 2002 to October 2007 bull market move which comes into play at 10,725.