The rally is extending but this move is about to end. In fact it could have ended. Sentiment is still bearish after a five-day rally. The BTI is still declining on rising prices (bearish divergence), this suggests that the next move will be down. Of course this indicator is lagging and it could turn up in the next few days but as long as it remains down we are looking to short the FTSE.
We still have some negative developments that will be a drag on the rally, in particular slowing growth, rising threat of terrorism and Ebola. Each time a new case of Ebola is reported in the West the markets dip. So today the FTSE will open lower after a health worker tested positive for Ebola in New York.
On the economic front the news from Europe was positive and this is why markets rallied yesterday. Manufacturing PMI in the Eurozone beat estimates and Chinese HSBC manufacturing PMI was slightly higher than expected. But one good number does not make a trend and despite all the efforts by the ECB, many experts believe that economic activity in Europe will continue to stagnate.
After completing a rally in three waves [(a),(b),(c)] the FTSE dropped to 6313 yesterday then a powerful rally carried the index to new highs, this means the rally is still underway. The bad news is that the FTSE is still lagging the S&P, the US index has retraced nearly 78% of the decline, the FTSE has retraced about 40% of its decline. You will recall that the FTSE has a habit of leading the way, when the FTSE does not follow the S&P higher, stock markets will decline. This occurred during the summer when the S&P was hitting new highs while the FTSE was going sideways. That was a warning the stock market would go down and it did go down during September-October. A similar situation is repeating itself.
|FTSE 100||Today||Next few days||Next few weeks|
|Risk of trend reversal||Low||Medium||Low|
|Key Reversal Levels|
|FTSE 100 cash||below 6313||above 6571||above 6571|
|FTSE 100 Future||below 6291||above 6549||above 6549|
The trend is likely to reverse when the risk of a trend reversal is High. A breach of a key reversal level implies a neutral position.
Research provided by e-Yield