UK Stocks Rally as Markets Contemplate Overreaction

FTSE 100 News and Analysis

• FTSE posts intra-day recovery as markets digest extreme selling
• By design, the FTSE appears vulnerable to worsening banking rout
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

FTSE 100 Posts Intra-Day Recovery as Markets Digest Recent Extreme Moves

The FTSE 100 index has come under pressure in the wake of the multiple midsized bank failures in the US, and, not to mention, the inevitable sale of the beleaguered Credit Suisse. The index outperformed other major indices towards the latter stages of 2022 and the early trading weeks of 2023 but the direction of travel has not only changed, but it has changed rather quickly.

FTSE price action shows a sizeable intra-day reversal that now has the index testing the 200 day SMA, this time as resistance. Further upside potential appears via the 7513.50 and 7617 (December high) markers. The recent pullback offers FTSE bears more attractive levels to assess bearish continuation setups. The RSI shows prices coming back form oversold territory, where a potential extended pullback ought to see the index move further into the normal range. Levels of interest for further selling include the 7295 (20 December low) and the crucial 7170 level which acted as a pivot point for the index multiple times throughout 2022.

Daily FTSE 100 Chart

Source: TradingView, prepared by Richard Snow

FTSE Remains Vulnerable to a Worsening Outlook in Global Bank Stocks

The FTSE has dropped more than the DAX as well as the EU Stoxx 50 index and this is largely due to its sizeable weighting in financials and energy compared to the others. As of January the 1st of this year, the FTSE had a weighting in financial stocks of over 17%, compared to 12.5% for the DAX and 11.8% in bank stocks for EU Stoxx 50. In addition, the FTSE 100 has a sizeable weighting towards energy stocks like Shell and BP, with the overall sector making up just over 13% of the index.

The massive rout in the banking world not only sent financial stocks spiraling but also led to lower oil prices as traders envisioned lower future economic activity due to the recent sell-off. Oil is often considered a forward looking indicator of economic activity and the recent drop in price suggests a bearish outlook on global activity.

Source: Siblis reasearch, prepared by Richard Snow

Taking a look at how the index has fared, it is clear to see stress developing in the heavily weighted financial, energy and materials sectors. If this trend continues, further selling of the index is not out of the question.

FTSE Sector Performance from the SVB Distress (March 9th)

Source: Refinitiv, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX