The recent Portugal banking crisis has spooked the investors globally and brought the European markets off their highs. DAX which had been trading just above 10000-mark has slipped to 9700 levels, FTSE 100 dropped from 6880 to 6715 and CAC 40 plummeted to sub-4300 levels from close to 4500. You can read about the Portugal banking crisis and how it sent tremors through the major global markets here: https://nikhil9154.wordpress.com/2014/07/12/just-one-bank-sent-nifty-diving-on-budget-day/

But frankly, that is not important. What is important and even more interesting is; how do the stock markets view it? Is this correction another buying opportunity or is it an indication of a bigger fall to come? While it can be safely said that the impact of the current European crisis has so far been limited given that most of the global markets have reversed their losses, could the same be said for the European indices? In this piece, let us analyze where the FTSE 100 actually stands and what could we do to secure our investments or how could we profit from the correction.

Image: https://www.tradingview.com/e/Q1FRbM7K

As can be seen from the weekly chart above, FTSE 100 is in a very strong upward momentum but since May 2013 has been struggling near 6800 levels. The index has had an astounding rally from 4800-level in the latter part of 2011 to 6880-level at present. And now is an even more interesting time as it currently trading at an “inflection” point from where it could either jump 15-20% or crash 10%. The index is currently trapped in a price range which has taken the form of an ascending triangle pattern marked as PATTERN -2 in the image above. The ascending triangle is a bullish pattern and signifies hefty gains in the future (take a look at the ascending triangle pattern-1 in the image). PATTERN-2 already having had a fair number of price reversals, looks set for a breakout in the near term and considering that the current level of FTSE 100 is at 6700, which also happens to be very close to the strong upward sloping support line, I would suggest that long positions be initiated at current levels with a stop-loss placed just below 6600. A breakout above the horizontal resistance of 6880 would set the index well on course to achieve 7400 while a breakdown (due to another flight of capital) below 6600 may puncture the bullish momentum and the index may be looking at 6000.

The index has traded above the pre-2008 highs comfortably and the price action nowhere paints a bad picture for the European index. Having said this, any major crisis developing in Europe or any other event which has the potential to dampen the party mood of the market will be depicted in the prices (in the form of a breakdown) and hence, the significance of the stop-loss. But until then, there is no need to panic or take money off the table as the bulls are definitely on a strong footing.

This analysis is an effort to provide an accurate picture without the technical jargons and price indicators and is simplified to help everybody make wise investment decisions. Weekly charts incorporate major indicators such as the RSI, Momentum, Money Flow Index and etc. in the prices and hence, they have not been used. From a personal experience, I would advise that we follow the trend of the market and not let our unnecessary hypotheses or fear make us sit on a major rally. Let your profits run, cut down on your losses and the market will take care of everything else.

Until then, Happy Investing!

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