The blue-chip FTSE 100 <.FTSE> closed lower on Wednesday after bouncing once again off an important technical resistance level, led by heavyweight energy stocks on a fresh bout of euro zone debt-inspired risk aversion.
The index traded in a fairly tight range for the early part of the session, rising to test 5,700 before bearish comments from a top official at ratings agency Fitch over the handling of the sovereign crisis sent markets lower.
Fresh talk of an imminent downgrade of France's credit rating, denied by a senior French source, added to the bearish tone, although the UK market ended off its lows, down 0.5 percent, or 25.8 points, at 5,670.82, giving back a third of Tuesday's gain.
Oil majors Royal Dutch Shell
That same concern underpinned a 4.2 percent rise in volatility, as measured by the FTSE Volatility index <.VFTSE>, to 20.79.
We failed to break 5,700, which is quite a big resistance level, while a sliding euro was contributing to the regional equity market weakness, said Trevor Coote, head of equity sales at Alexander David Securities, adding he was now targeting further short-term weakness before buying back in.
The level had been up to or briefly past the level on three previous occasions since the start of the year, but conviction to hold above proved light, teeing up the retreat after a rally over recent weeks.
We had a good run recently, starting the year around 5,500 so you're going to get some pullback. We're positioned short and have taken funds out, to hopefully take advantage of a downwards move. Coote said he was looking for a push down to 5,200-5,400.
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MAN OH MAN
Mike Lenhoff, strategist at Brewin Dolphin, said his charts showed the index overbought on several levels, and the last time he had seen this was October 2011, when the FTSE 100 failed to get much past 5,700.
Rather than a major sell-off, however, Lenhoff said he expected the pullback to be at worst a shallow retreat, before the recent upwards momentum continued, buoyed by factors including improving U.S. economic data and recent moves to help contain the region's debt crisis.
The degree to which buyers come back in force and underpin a further move higher will be crucial, however, as the slide in volumes experienced across developed Europe equities since last summer shows no sign of a marked reversal.
Traded volumes on the FTSE 100 were just over their 90-day daily average by the close, but, as that covered the holiday-thinned Christmas period, this was a crimped number to begin with.
Nevertheless, among the most heavily traded stocks was Cairn Energy
Broker action helped fuel a surge in interest in other stocks including ITV
With the fourth-quarter earnings season already kicked off in the United States, Sainsbury's
Sainsbury's boss Justin King said he saw no improvement in the business environment this year and expected the consumer to remain in a very tough place.
(Additional reporting by Mark Potter; Editing by David Cowell)