By Thierry Laduguie
The FTSE 100 rallied to 5876 and became overbought on e-Yield indicators. The end of an Elliott wave accompanied by an overbought indicator is a strong indication that the FTSE will pull back in the short term. There are two scenarios:
1. An immediate decline
As the advance from the low on 26 July is in five waves [1,2,3,4,5 (circle)] with an extension in wave 1 (circle), in theory we can conclude that wave (c) is over and the FTSE will pull back. This view is supported by the overbought indicators Top 20 Differential and 13-day BTI.
2. First a rally to 5890 then a decline
There is however an alternate wave count shown on the above chart. The reason this pattern is possible is that wave 5 (circle) is too short in magnitude and duration. Compare wave 5 (circle) to wave 1 (circle) and 3 (circle) and you will agree that wave 5 (circle) is short. Same thing with time, wave 1 (circle) and 3 (circle) lasted many days, wave 5 (circle) lasted a few hours. Furthermore if we look closely at the latest pull back from 5875 to 5822, the move is not impulsive as it should be in a downtrend but corrective in three legs. This suggests that the FTSE will probably rally to new high. I am not saying a big rally but enough to push prices near 5890. The most obvious pattern would be an ending diagonal in wave 5 (circle), this pattern consists of two converging trendlines, the FTSE would zigzag between the two lines until it reaches 5890. Thereafter the decline would start.
The S&P last move up ended with an a,b,c pattern which is not ideal, the rally should end in five waves. For this reason the S&P could make a new high before the rally is over. It's not clear what the pattern at the top is but it could an ending diagonal in progress. The thing with ending diagonals is that they are not as powerful as impulse waves, if it is an ending diagonal the upside will be limited. An initial target is 1415. The next move should be down to 1380.
Which way next?
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Thierry Laduguie is technical strategist at e-Yield