Is now a good time to buy UK stocks? Charts point to a potential rally
Together with continental Europe, the United Kingdom is affected by the war in Ukraine too. Rising inflation is another common theme the European Union and the UK share in these troubled times.
But despite all the challenges this year has brought, the stock market trades near its yearly highs. The FTSE 100 index tests horizontal resistance again, and if broken, it completes an ascending triangle pattern, suggesting that more upside lies ahead.
UK 100 struggles at horizontal resistanceCopy link to section
An ascending triangle is a continuation pattern. Its main feature is a horizontal area that offers resistance for a while until the market is strong enough and overcomes it.
Once the market breaks above resistance, the ascending triangle pattern ends. Technical traders use its measured move to project the potential advance that typically follows.
To calculate it, traders use the ascending triangle’s longest segment and project it higher from the horizontal resistance area. In the case of the FTSE 100 index, the measured move have a length of about 800 points.
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Thus, projected from the 7,600 area which offered horizontal resistance, it reveals a potential target of 8,400 points.
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Inflation boosts the stock marketCopy link to section
Inflation is the rising prices of goods and services over a period. Central banks worldwide have a monetary policy closely linked to inflation levels.
It has been a common target for most central banks to have certain levels of inflation, high enough to avoid deflation (i.e., decreasing prices over time) but small enough to negatively impact economic activity.
But it was difficult to create sustainable inflation in the past, and most central banks failed to bring it to the common 2% target.
That is not the case anymore.
The reaction to the COVID-19 pandemic inflated prices in the advanced economies to unthinkable levels. Moreover, the war in Ukraine triggered supply chain disruptions that further fueled inflation.
In the UK, inflation is forecast to be well into the double-digit territory at the end of the year. Typically, higher inflation levels fuel the stock market and weigh on the local currency.
To sum up, the FTSE 100 index might easily break above horizontal resistance, given the rising inflation. As such, a move above 7,600 triggers a run at the 8,400 area.