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FTSE 100 Forms Head and Shoulders: Is A Sell-Off to 7,250.0 Imminent?

FTSE 100
FTSE 100

FTSE 100 traded sharply lower earlier in today’s European session to 7,403.7 before recouping its losses. As of this writing, the UK’s stock index is trading around its opening price at 7,451.3.

Without any economic report released from the UK today, the volatility could be driven by a few factors.

One, investors could still be digesting the surge in coronavirus cases earlier this week. China’s report which showed an increase of 14,480 cases overnight triggered widespread risk aversion. However, today, stock markets seemed calmer when the country reported only 5,090 new cases overnight.

Secondly, there was Chancellor of the Exchequer Sajid Javid’s abrupt resignation yesterday which also weighed down UK stocks. He was immediately replaced by a close ally of Prime Minister Boris Johnson, Rishi Sunak. This new appointment has some investors talking that the government may be able to implement more fiscal stimulus as Johnson has more control of the chancellor’s office.

Thirdly, the sharp drop in today’s European session could be driven by some investors taking profit before the weekend.

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FTSE 100 Outlook

On the hourly time frame, we can see that FTSE 100 CFDs formed lower highs after a series of higher highs. Consequently, a head and shoulders pattern has materialized. The stock index has tested neckline support around 7,400.0. However, a strong bearish close is needed to trigger a bigger sell-off. If this happens, FTSE 100 could trade lower to 7,250.0 where it bottomed on January 31. On the other hand, a close above today’s highs at 7,464.1 may invalidate the bearish chart pattern. It could instead suggest that FTSE 100 may soon rall to its February 13 high at 7,561.0.

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