Back into a bullish market or dead cat bounce? FTSE

The UK benchmark index has been bucking the trend among European stock markets, but is that going to last?

Why now?

In early March, the FTSE 100 practically reached its pre-pandemic level. But, it turned out to be just a temporary peak as investors likely considered the impact of BOE rate rises. Then it plunged following the Russian invasion of Ukraine. Which is important for this analysis.

The UK has a lot of financial exposure to Russia, as it is a favourite place for Russian billionaires to make investments. Abramovich being the most famous, but many Russian firms are listed in London, such as Evraz. Many firms also have investments in Russia. Of course, the more well-known BP stake in Rosneft got a lot of attention. But there are a lot of other firms that are also affected, from IAG's increased costs in flights to the Far East, Rolls Royce needing Russian titanium, to Coca-Cola HBC's operations in Ukraine.

The rebound

However, the FTSE 100 rebounded quite quickly despite the BOE signalling increased tightening. Part of that could be explained that while UK firms might have investments in Russia, the UK is comparatively less dependent than the economies on the continent. UK firms wrote down Russian assets, and can return to growth. Continental firms now have to worry about an interruption in supplies from Russia, such as fuel and coal.

Meanwhile, the BOE has already hiked, and could potentially start slowing down the tightening process in the near future as inflation is expected to start getting under control. On the other hand, the ECB hasn't even started its tightening cycle. Meaning that comparatively, the UK economy could be looking at less monetary policy constraints than Europe. Which could be encouraging investors to focus more on London. But, both the UK's ONS and the ECB are projecting similar growth rates: the UK forecasts 3.6% growth this year, while the EU expects 3.7%.

The FTSE 100 might have recovered from its post-Ukraine war drop, but it's still an open question whether it can maintain the bullish divergence from continental bourses.

FTSE momentum seems exhausting

In the short term, the index could consolidate in a tight range between the 50-day average of 7435 and the Feb 10 high of 7700. As observed in the charts, an initial move back down to 7250 would see volatility spike towards the 200-day average. A break there, would see further bearish reaction in the medium term, down to 6753.

Into new highs investors, it is a good idea for traders to wait for the rallies to completely exhaust themselves before shorting the index as this will give them greater profit potential while reduce risk. There is some room to tag the 7700 on the RSI, but once it goes overbought, it will be hard to make a decent attempt for 7913. The MACD histogram exposes a hidden divergence already, which makes the DCB quite the likely scenario.

Source: Trading View

Key takeaways

The FTSE 100 rebounded quickly after the BOE signalled tighter monetary policy but several British companies have major investments in Russia and thus FTSE is susceptible to the invasion of Ukraine. However, the UK is comparatively less dependent than the EU, and the ECB hasn't even started its tightening cycle, which is an encouraging sign for investors.