The thing with trading is that you never know when you will make the profits for the year. There will be times when the market is difficult and times when the market is friendly. The key is to maximise profits when you are right and minimise losses when you are wrong...read more
So far today we have a weak FTSE 100 confirmed by the firmer GBP/USD and the weaker S&P 500. If I look at the Dax 30 it looks like the Dax will decline too in three waves similar to the previous decline. This pattern could be an expanding triangle. However the pattern is not very clear, it can be interpreted differently.
The pound gave a few false signals recently but the latest break below a support area near 1.2380 is a clear indication the decline will extend. The pattern is an impulse wave [(i),(ii),(iii),(iv),(v)] and we are now near the bottom of wave (iii). Expect a bounce to the 1.2340 area followed by a decline to 1.2250.
As I write GBP/USD is pushing back to 1.2500, we could be at the start of a larger move to 1.2700. The pound has been trading sideways for a while, this kind of move is generally a pause in the main trend. If we assume that the trend is up (the rally from the low in January), the uptrend is still in place and the rally is about to resume.
The reason I question the next move is because there are two ways to look at the triangle. In terms of Elliott wave analysis, sometimes the pattern is not clear, for example where did the previous rally ends? This rally is in five waves, however, did it end at 1.2673 [top of wave v (circle)] or at 1.2700 [top of wave b (circle)]? The end of a five-wave rally is followed by a decline in three waves so if rally ended at 1.2700, the decline to new lows in February is the first leg of a larger correction and the triangle is the second leg. This imply a decline for the third leg.
The problem with this scenario is that while the rally to 1.2700 can be counted in five waves, on my charting application the previous decline which is the fourth wave touched to top of the first wave. This is called “overlap” which is not possible under Elliott wave rules. In an impulse wave the fourth wave cannot overlap the first. Therefore the rally ended at 1.2673, that level is the top of wave v (circle).
The corrective wave is in three wave [a,b,c (circle)] as you would expect in a counter trend. Based on the Elliott wave pattern the rally from the low in February is the start of the next five-wave rally, this move is wave i (circle) and the triangle [(a),(b),(c),(d),(e)] is wave ii (circle). This suggests we are now in wave (iii) up to 1.2700. Such a move would be a drag on the FTSE 100 and if the S&P 500 pulls back as well, the FTSE 100 could decline back to 7200 or lower in the short term.
The FTSE is rallying because it's near oversold and investors expect a decline in the pound. The stock market is forward looking, it does not matter what the pound does now, what matters is what it will do tomorrow / next week...read more
I note a near perfect negative correlation between GBP/USD and the FTSE 100. It seems the direction of the pound is more important than the direction of the S&P 500 when it comes to forecasting the FTSE 100. I'll analyse the pound then... read more