For weeks, market participants have been speculating about what might the outcome of the Brexit vote will be. While the results are not due in until the early hours of Friday, it looks like the bookies and the markets have made up their minds. Stocks, oil, pound, and everything else considered a "risky" asset, including copper and emerging market currencies, all surged higher this morning in favour of safe haven gold, yen, dollar and Swiss franc. While the latest opinion polls are still neck and neck (for example 52 to 48 per cent in favour of remain, according to Ipsos Mori for the Evening Standard), the latest odds from betting firm Betfair predict an 84 per cent chance of remain in today’s UK Referendum, up from 78 per cent earlier in the morning. But that hasn’t stopped people from betting on a Brexit outcome. Indeed, another betting company, Ladbrokes, in a tweet this morning said that 55% of bets from their customers were for Leave. This may appear contradictory, but because of the implied high probability of a Bremain, the bigger pay-out will be for Brexit; this is how gamblers typically like to bet.
Of course, as for as the financial markets are concerned, it is a different story. Here, traders are sharply unwinding their Brexit bets by the looks of things. The combination of short-covering and new bullish positions has helped to fuel a sharp rally in risk sensitive assets. But given this week’s big rally, one would need to be wary of the possibility of "buy the rumour, sell the news" type of a reaction when the outcome of the vote is announced. While the pound and stocks could easily extend their gains in the event of a remain outcome, I think now the potential upside will be limited, certainly compared to how much they could fall in the event of an exit outcome.
Don’t forget what happened in the aftermath of Scottish independence vote
So, if the outcome it is indeed remain, the FTSE could rise initially by a noticeable amount before the profit-takers potentially exert their pressure. Traders may recall that in September of 2014, in the lead up to the Scottish referendum, the FTSE began to drift lower on concerns Scotland would leave the UK. At the time, I heard so many people suggesting that if Scotland were to leave the UK, that the FTSE would plummet and that if it remained part of the UK, the index would break to new all-time highs and stage a massive rally. Well, as it turned out, Scotland voted to remain in the UK and lo and behold, the FTSE staged a minor relief rally only. BUT a major sell-off then followed after the index re-tested a major resistance area, then around 6850-6900, before dropping a massive 800 points or 11.7% by the very next month from that peak to the low.
So, just because the FTSE is rising today and it may well rise further tomorrow in the event of a "remain" outcome, it does not necessarily mean it will be able to hold onto its gains in the coming weeks as the focus shifts back onto the wider global issues. Of course, I could well be very wrong but it is worth pointing out the possibility nonetheless.
Anyway, the FTSE has today broken above the prior swing high and bearish trend line around the 6320 area, which is technically a bullish scenario. Assuming the bulls will now be able to defend this area, they may aim for 6425/30 as their next target, which was the high from earlier this year. Beyond this level, the 61.8% Fibonacci retracement against the all-time high comes in at around the 6500 area. This will be the second big target going forward. Meanwhile if the FTSE were to break back below the 6320 area, this would be a bearish development. In this potential scenario, the index may drop all the way back to its 200-day moving average around 6150 before deciding on its next move. In the event of a Brexit vote, the potential sell-off could go far beyond this level.