On 21st February the 13-day BTI was overbought and the FTSE 100 declined. Now we have the opposite situation. The two timing indicators, Top 20 Differential and 13-day BTI became oversold last week and the FTSE is now rallying.When these timing indicators are oversold the odds of a short term rally increase. This is supported by the position of the Directional Movement index at the bottom of the chart and the fact that prices are below the 200-day moving average. Each time the blue line drops below 13 the FTSE starts to rally. Based on the wave count the trend is up, the FTSE should rally to new highs over the next two or three weeks. This scenario calling for a rally to new highs will only gain credibility when the ESI turns turns bullish. Right now the ESI is bearish.
I can't be sure if the trend is up or down because the e-Yield Sentiment Indicator (ESI) is bearish. When sentiment is bearish the odds favour a decline which means we have a conflict between the wave count and the ESI. Perhaps the trend has turned down but the FTSE will bounce back as it is oversold.
This is why I am reluctant to go heavily long in case the rally is a counter trend in a short term decline. If the trend has turned down the ESI will remain bearish and the FTSE will find resistance near 6625. This is a possibility because the events in Ukraine could lead to more problems. The sanctions announced yesterday are very soft, this is why the stock market rallied. It seems the US and Europe have kept the more severe sanctions for later in case Russia annexes Crimea or invades eastern Ukraine. If Russia was to escalate the crisis, more severe sanctions would be announced and the stock market would sell off. This is a difficult time to trade because we should be long at a time when the risk of a sell off is high. We can't predict what Russia will do next but we can be cautious with our portfolio, until the smoke clears.