A Weighty Problem
As a Technical Analyst I am quite happy to pick up a chart, analyse the trend, support and resistance levels, investigate any measured patterns and come up with a set of targets and statements on which direction I would expect the market to go, and what set of circumstances would change my view.
My current favourite set of long-term chart patterns exist in the headline indices – SP500, DJIA, FTSE, and Dax – all of which have displayed fairly characteristic movements over the past 10 years, and all of which still look weak, and have the potential – I believe – to go quite a bit lower.
I also believe that any respite offered by the looming conflict with Iraq – or Korea – or NATO – or Europe (please delete or add as you deem appropriate), will be fairly short lived. The only thing that will stop these markets going down in the long term is a steady stream of good corporate trading results; that is results from real trading rather than cutting back workforces or limiting the amount of paperclips available to the accounts department!
In this article I particularly wanted to have a look at the FTSE100 index – the leading UK shares by market cap. For those of you not familiar with the index make-up and the weightings, here is a spreadsheet with the current members and their rankings:
FTSE100 Weightings Spreadsheet
If you run Excel2000 or better you can automatically update the spreadsheet by clicking on the LSE logo at the top. You also have to have visited the LSE site London Stock Exchange and agreed to their T&C, which is easily done by following the pricing links – it places a cookie on your machine so that you can then go straight through to the pricing modules.
FTSE100
So, looking at the FTSE100 itself, we can see a fairly obvious bear trend and overall a large head and shoulders pattern with a target of 2400 - pretty scary stuff considering that is a further drop of another 35% from where we sit today (c3700). What should also not be ignored is that we have something like 900 points of upside available and we still remain under the overall bear trend, and that although we have had an initial retest of the break c45/4600 it has not really been fully retested as such breaks normally are.
What particularly interested me was what would have to happen for FTSE to get down to the 2400 area, after all that is still some spectacular drop from the current levels. Although the H&S reversal is obvious in the overall index, how obvious are the patterns in the individual stocks and if they do contain measured patterns, what are the targets?
Weightings
Rather than wade through the entire index, I have taken the top 12 companies, this covers approximately 60% of the weighting of the index, basically we could completely lose the odd one or two of the remaining companies and the effect would be particularly small.
The companies and their weighting are:
Obviously the weightings change on a daily basis as the worth of the individual stocks change, but this is a fairly representative view of the current top 12 companies.
Perhaps worrying is also the range of sectors represented at this level
In reality, the direction of the FTSE100 comes down to the performance of the banks, oil and drugs companies, with Vodafone thrown in for good measure, if any one of these sectors has a bad day at the office, then the whole index suffers badly – and of course the converse is also true.
Charts
Time to look at the individual charts of the top 12 companies:
BP
A bear trend, resistance at 480, support at 360. The initial target for the break of 480 is 300, basis the multiple top pattern, this in itself would represent something like a 23% drop from current levels, however, what concerns me more is that to reach the 300 target, 360 will obviously have to be broken, which opens up a much bigger can of worms with a target closer to the base support at 150.
VOD
Currently neutral after the big tech dump, however there are some fairly firm levels of resistance sitting above the market, and it wouldn’t really take much to see VOD return to the bottom end of it’s range, a 30% drop. Whether it would continue to be supported at the 80p level, who knows, but if we are talking about a situation where banks and oils are falling over, then I would doubt that this level would hold – however, lets stick with 80 as a target for the moment.
GSK
This is just plain ugly! A massive double top through 1400, with a target of 500. Not unexpected support at the psychological 1000 level, but 500 looks like a ‘do-able’ level from this chart – again, similar to FTSE, although the 1400 level was retested quickly it hasn’t been retested in ‘slow-time’ so even a first-shot rally has plenty of room to move under the current trend and resistance levels.
HSBA
Considering the carnage seen by many FTSE100 companies, HSBA has held up reasonably well (if you can call 40% or so from the highs ‘well’). However, the distribution pattern forming over the past 4 years is starting to look ominous. If (and it is only if) the 600 level is breached, then we have the completion of a head and shoulder reversal with a target c150 – which really would be something! At the moment it is holding although still under a short term bear trend, but this level is key.
RBS
Again, holding up quite well considering the overall market conditions, still above it’s long term bull trend but suffering in the short term. The key level here is 1150, this opens the way up for yet another head and shoulder reversal with a frightening target c 300 or so. The good news is that the pattern still remain incomplete and the price action remains around the 1300/1600 range at the moment.
......cont next page
As a Technical Analyst I am quite happy to pick up a chart, analyse the trend, support and resistance levels, investigate any measured patterns and come up with a set of targets and statements on which direction I would expect the market to go, and what set of circumstances would change my view.
My current favourite set of long-term chart patterns exist in the headline indices – SP500, DJIA, FTSE, and Dax – all of which have displayed fairly characteristic movements over the past 10 years, and all of which still look weak, and have the potential – I believe – to go quite a bit lower.
I also believe that any respite offered by the looming conflict with Iraq – or Korea – or NATO – or Europe (please delete or add as you deem appropriate), will be fairly short lived. The only thing that will stop these markets going down in the long term is a steady stream of good corporate trading results; that is results from real trading rather than cutting back workforces or limiting the amount of paperclips available to the accounts department!
In this article I particularly wanted to have a look at the FTSE100 index – the leading UK shares by market cap. For those of you not familiar with the index make-up and the weightings, here is a spreadsheet with the current members and their rankings:
FTSE100 Weightings Spreadsheet
If you run Excel2000 or better you can automatically update the spreadsheet by clicking on the LSE logo at the top. You also have to have visited the LSE site London Stock Exchange and agreed to their T&C, which is easily done by following the pricing links – it places a cookie on your machine so that you can then go straight through to the pricing modules.
FTSE100
So, looking at the FTSE100 itself, we can see a fairly obvious bear trend and overall a large head and shoulders pattern with a target of 2400 - pretty scary stuff considering that is a further drop of another 35% from where we sit today (c3700). What should also not be ignored is that we have something like 900 points of upside available and we still remain under the overall bear trend, and that although we have had an initial retest of the break c45/4600 it has not really been fully retested as such breaks normally are.
What particularly interested me was what would have to happen for FTSE to get down to the 2400 area, after all that is still some spectacular drop from the current levels. Although the H&S reversal is obvious in the overall index, how obvious are the patterns in the individual stocks and if they do contain measured patterns, what are the targets?
Weightings
Rather than wade through the entire index, I have taken the top 12 companies, this covers approximately 60% of the weighting of the index, basically we could completely lose the odd one or two of the remaining companies and the effect would be particularly small.
The companies and their weighting are:
Code:
<table>
BP BP. 10.07%
VODAFONE GRP. VOD 8.94%
GLAXOSMITHKLINE GSK 7.81%
HSBC HLDGS.UK HSBA 7.21%
ROYAL BANK SCOT RBS 4.79%
ASTRAZENECA AZN 4.18%
SHELL SHEL 3.98%
BARCLAYS BARC 2.82%
HBOS HBOS 2.60%
LLOYDS TSB GRP. LLOY 2.55%
DIAGEO DGE 2.18%
UNILEVER ULVR 1.81%
Total 58.94%
</table>Obviously the weightings change on a daily basis as the worth of the individual stocks change, but this is a fairly representative view of the current top 12 companies.
Perhaps worrying is also the range of sectors represented at this level
Code:
<table>
Sector %FTSE %Top 12
Banks 19.97% 33.89%
Oil 14.05% 23.84%
Pharma/ Chemicals 11.99% 20.34
Comms 8.94% 15.17%
Leisure 2.18% 3.70%
Food 1.81% 3.07%
</table>In reality, the direction of the FTSE100 comes down to the performance of the banks, oil and drugs companies, with Vodafone thrown in for good measure, if any one of these sectors has a bad day at the office, then the whole index suffers badly – and of course the converse is also true.
Charts
Time to look at the individual charts of the top 12 companies:
BP
A bear trend, resistance at 480, support at 360. The initial target for the break of 480 is 300, basis the multiple top pattern, this in itself would represent something like a 23% drop from current levels, however, what concerns me more is that to reach the 300 target, 360 will obviously have to be broken, which opens up a much bigger can of worms with a target closer to the base support at 150.
VOD
Currently neutral after the big tech dump, however there are some fairly firm levels of resistance sitting above the market, and it wouldn’t really take much to see VOD return to the bottom end of it’s range, a 30% drop. Whether it would continue to be supported at the 80p level, who knows, but if we are talking about a situation where banks and oils are falling over, then I would doubt that this level would hold – however, lets stick with 80 as a target for the moment.
GSK
This is just plain ugly! A massive double top through 1400, with a target of 500. Not unexpected support at the psychological 1000 level, but 500 looks like a ‘do-able’ level from this chart – again, similar to FTSE, although the 1400 level was retested quickly it hasn’t been retested in ‘slow-time’ so even a first-shot rally has plenty of room to move under the current trend and resistance levels.
HSBA
Considering the carnage seen by many FTSE100 companies, HSBA has held up reasonably well (if you can call 40% or so from the highs ‘well’). However, the distribution pattern forming over the past 4 years is starting to look ominous. If (and it is only if) the 600 level is breached, then we have the completion of a head and shoulder reversal with a target c150 – which really would be something! At the moment it is holding although still under a short term bear trend, but this level is key.
RBS
Again, holding up quite well considering the overall market conditions, still above it’s long term bull trend but suffering in the short term. The key level here is 1150, this opens the way up for yet another head and shoulder reversal with a frightening target c 300 or so. The good news is that the pattern still remain incomplete and the price action remains around the 1300/1600 range at the moment.
......cont next page
