When the market is stimulated the moves up will extend and the pullbacks will be short lived. This means if you want to go long you must do so early otherwise there is a good chance you will miss the rally. In this environment it is risky to go short, what is overbought becomes more overbought. If you want to go short, you must delay your trade i.e. wait as long as possible before shorting.
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If you are a short term trader you need good timing to profit from rising and falling prices. I have developed some reliable indicators to help you and these indicators work well in any condition, stimulated or non-stimulated. Using my indicators and applying Elliott wave analysis has helped our members more than double their money in the last 16 months (trading FTSE 100 and options).
Non-stimulated market: Elliott wave
A non-stimulated market is a normal market where central banks have little or no influence on the market. The FTSE 100 will be affected by economic reports, earnings and sentiment. In a non-stimulated market the Elliott wave is the primary tool and the BTI is the secondary tool. The BTI is a sentiment indicator used to assess the direction of the FTSE 100. Basically in this environment the Elliott wave will be accurate enough to forecast the market, I will use the BTI to confirm the Elliott wave. When the two tools point in the same direction the odds of making a profit are high.
Stimulated market: BTI
A stimulated market is one that is boosted by monetary policy. Here the central bank will provide stimulus / quantitative easing, this is what we are currently witnessing in the UK. In such a market I will give more importance to the BTI. In this environment the BTI is the primary tool and Elliott wave is the secondary tool. The strategy here is to follow the direction given by the BTI and trade in that direction, the wave count becomes the secondary tool to support the BTI. For example the BTI turned up on 29 June and has been rising ever since. This suggested the FTSE 100 would rally, the BTI was spot on and this explains why the BTI is the primary tool to forecast the stock market when the market is stimulated.
When the BTI is rising it is not recommended to go short, however the only time we can go short with a rising BTI is when the timing indicators (13-day BTI, 34-day BTI, Top 20 Differential) are overbought. I will discuss these indicators in my next article, basically these indicators identify important turning points. When they are overbought the FTSE will decline. For example right now the 34-day BTI is overbought.
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