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How much further can the FTSE 100 stock index fall?

As you are probably well aware, this week has been a horrid one for the FTSE 100 index. It has lost £152bn in value so far, putting it down 8% in trading this week in just four days. Why? Mostly due to negative sentiment from investors who, worried about the outbreak of the coronavirus, are pulling their money out of the stock market. This is because equities are seen as one of the higher risk asset classes, and so these funds will likely either be held as cash (seen as the lowest risk store of wealth) or possibly gold.

For those who remain invested in the market, or who have excess free funds which they are looking to put to work, the big question is where is the market going to bottom out at? When will the falling knife hit the floor?

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These are very valid questions because if I had spare funds at the moment, I would be eyeing up buying into the FTSE 100. While I issue a disclaimer here, that no one can perfectly call the bottom or top of the market (just ask people who bought into Bitcoin at $20,000), we can look at some ideas.

Technical analysis

This analysis is based on charting and patterns, with the assumption that in some form, history repeats itself. It also looks for previous levels of support or key resistance levels that have been important in the past.

A key level of support is 6750 which is the low from 2019, followed by 6525 which was printed in 2018. Below that is no man’s land, with us then looking back to levels seen at the EU referendum in 2016. 

Should we manage to bounce off the support at 6750, then the FTSE 100 has plenty of room to retrace this move back higher, with 7000 being a large psychological resistance level now.

Another gauge is the relative strength index (RSI). This highlights when the market is overbought or undersold, by running an algorithm. It can spit out a number between 0 and 100, with anything above 70 being overbought, and anything below 30 being oversold.

Currently on a daily picture, it is at 15, the most oversold technically since February 2018 (when we last had a sharp sell-off). In 2018, we dipped to 14 before bouncing back to 49 just a few weeks later, which could indicate that we are nearly at the bottom this time in terms of how oversold the FTSE 100 is.

Fundamental analysis

Aside from charts and numbers, what does the sentiment tell us? Well at the moment some of the stocks I keep a close eye on within the FTSE 100 are starting to look cheap from a valuation point of view. One example of this is Lloyds Banking Group, which is teetering very close to making a five-year low below the 50p mark. 

Is there anything tangible as to why Lloyds is performing so badly? Has the business recorded large losses recently, or surprised us with a poor trading update? Not at all. Therefore, from a fundamental point of view, I think this move lower is coming to an end, as company valuations are looking cheap.

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Jonathan Smith owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.