Is UK100 Ready For a Reversal?

UK100 Daily Timeframe 11 January 2024

The UK100 on the daily timeframe, also known as the Footsie, has been moving in a strong uptrend until it plotted the study period high on 16 February 2023. This high sits at 8041.8. Since 16 February, the market has demonstrated strong mean reversion properties, as can be seen with a gentle downward-sloping regression channel added to the price, where rice oscillates above and below the mean in a somewhat predictable fashion.

This behavior places UK100 in the bearish camp. One might argue that the past two months of price action was a solid uptrend, which would be true for the short term. However, the trend is predominantly down if we take a zoomed-out view. 

Added to our downward bias is that we recently had the RSI and the Stochastic oscillator in the oversold territory. This signal is not a strong indication of an impending market reversal to the downside, but given the context of the market trading in the upper half of a downward-sloping regression channel, it adds significant weight to our outlook.

In red circles, one can see the four reversals that took place when similar setups occurred. 

But that's not the end of trouble for the bulls; combined with the overbought signals in the regression channel context, two very important factors place the bids squarely in favor of the bears.

First of which is the divergence on both the RSI and Stochastic oscillators.

Divergence is when, in this case, price action makes higher highs, but the oscillators make lower highs. This is a fairly reliable reversal signal. But coupled with the important support and resistance level, is it a setup of note? Price reached the 7733.1 resistance level and failed to trade above it with conviction.

This resistance area and the recent 7791.6 highs serve as an aggressive line in the sand. If bulls manage to push the price above this area, consider changing your bearish view. A more relaxed change point might be the 7954.3 resistance level or the top line of the channel. Any of these scenarios will invalidate the bearish view if surpassed with conviction.

As potential targets to the downside, the first and safest exit is usually the middle line of the regression channel. Which is roughly at 7500 psychological level.

If the bears continue their charge below this level, the next target is the 7288.3 support level, which proved very tough to subdue in the past.

Despite this, it's important to remain vigilant for any fundamental factors that could alter this perspective. From a technical standpoint, the bias remains firmly bearish until a close above recent highs indicates otherwise.

Summary

1. The UK100 is currently in a well-respected downward-sloping regression channel.
2. The bias is to the downside, with targets roughly at:
   1. Target 1: 7500
   2. Target 2: 7288.3
3. The RSI and Stochastic oscillators confirm the bias with their overbought and divergent readings.
4. The recent failure to stay above the 7733.1 level and the price being in the top half of the channel also add significant weight to the downside.
5. A convincing close above the 7791.6 resistance level will call for caution to bet on the downside.
6. A convincing close above the top trend line of the channel will invalidate the bearish outlook, which we can use to open a potential buy with a target of 7954.3.