The FTSE rallied near the previous high yesterday after Mario Draghi spoke at the ECB press conference. People are still listening to what he has to say. In a few months time they won't listen anymore, from positive mood investors will become more pessimistic. I can't say why or what will cause this change of mood, but I have observed this behaviour for many years.
The stock market rallies on bullish sentiment then this bullish sentiment becomes extreme (first degree bullish sentiment). At that point the 34-day BTI is above 400. This is where we are now. I said this is not a timing indicator and I was right, since this indicator has moved above 400 the FTSE is still near the highs. But what this indicator is telling us is that sometime in the next few weeks sentiment will turn negative and the 34-day BTI will start declining. The stock market will turn down too and the decline will last many weeks or months, until the 34-day BTI is near the lower limit of -400. Then a new cycle will start.
You can see on the 34-day BTI chart each move above 400 coincided with the start of a stock market decline and each move below -400 coincided with a stock market rally. For example the last time the 34-day BTI moved below -400 was on 20th October 2014, the FTSE closed at 6267. It is now near 7000. Today the indicator is at 538 and well above 400, this suggest that a big drop is coming, the FTSE could drop 10% or more between now and June.
But right now the FTSE is near the all-time high and there is chance the index will make a new new high before this big drop occurs. Yesterday's rally carried prices higher than I thought and today it is impossible to predict what will happen because we have the nonfarm payrolls report at 13:30. This is the most important announcement and when the numbers are not in line with expectations the FTSE can move up or down sharply. For this reason it is not recommended to trade intraday ahead of the report.
When I say I don't have a crystal ball I mean it. Please don't ask me where the FTSE 100 will be tomorrow or next week, I can't answer this question. The index could be anywhere especially if Draghi opens his mouth.
What I can tell you is that I get it right more often than I get it wrong and my average profit is bigger than my average loss. That's what matters in trading. I have said many times that profitable trading is a game of patience and sound money management. Too many people quit trading because they don't have the patience to wait for the big moves or they don't have the discipline to apply the rules.
I told you 2015 will be a good year. So far so good, we are taking money on a regular basis.
This week we shorted EUR/USD at 1.1370, we risked 165 pips and we made 243 pips. Patience paid and the profit was larger than the potential loss.
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Finally, investors should take money off the table before it's too late. My reliable 34-day BTI has given a sell signal on the stock market:
A move above 400 is bearish, however this is not a timing indicator which means the decline will not necessarily occur in the next few days. What this indicator is telling us is that a big decline is coming, the FTSE 100 will be trading significantly lower in the next few months. If you are a medium term investor it's time to get out.
The opposite situation is when the 34-day BTI is below -400 as it was on 20th October 2014. In this case it's bullish. That was a strong signal to buy and as you can see the FTSE 100 rallied strongly in November 2014.
Until next time,
The FTSE finally broke down yesterday, there was no support and the decline carried the index below 6900. There was no real reason behind the decline, simply profit taking. After a good run people will take profit, this occurs after five waves up.
The economic news was mixed. In Europe German retail sales data was strong but producer prices fell at an annual rate of 3.4%. I suppose this could have been the reason behind the decline, the threat of deflation is rising. Investors also could remain cautious ahead of the nonfarm payrolls report on Friday, this is an important report that could give us some clues about the timing of the Fed's interest rate hike. A hike is expected before the summer, however a strong report would precipitate a rise in interest rates. This would be negative for the stock market.
With stocks at multi-year highs investors are quick to take profits. Yes, a new high is always welcome and in general this will attract new buyers but in the current environment of rising interest rates in the US, deflation in Europe, slowdown in China, instability in Ukraine and Libya investors will be quick to take money off the table after a decent run. This is where we are now.
This profit taking pattern can lead to an ending diagonal pattern as each rally leg does not unfold properly. I believe this pattern is unfolding on the S&P, while on the FTSE the pattern appears to be an impulse wave up [1,2,3,4,5]. But if wave 4 ends below the top of wave 1 , the pattern will become an ending diagonal. At the moment wave 3 is in five waves [i,ii,iii,iv,v (circle)] and the next move is wave 4 down. The first support is above the top of wave 1 (impulse wave) near 6800, the second main support is on the 200-day moving average at 6689, in the case of an ending diagonal. Wave 4 is likely to end between those two levels.
Research provided by e-Yield
We continue to see strong resistance near 6950, the FTSE is unable to break decisively above that level. It will require some new fuel to push the index above that level. It's not clear at this stage where the good news will come from. The news was mixed yesterday, positive durable goods orders was balanced by worse than expected jobless claims.
Crude oil has been bouncing back, this is one reason the FTSE has been supported near the high, but the trend is crude oil is down, I expect crude oil to decline below the previous low. As a result stock market are likely to pullback, also because the Top 20 Differential is overbought for the second time. When too many blue chip stocks are too high investors will take profits and the FTSE will go down.
Yet and despite the overbought condition the FTSE is slow to pullback. So far the index looks strong but things can change rapidly. We must not forget that the index is in an uptrend and the target in the next few weeks is above 7000. In an uptrend the dip may not go far therefore in this situation if you are short it is always recommended to take profits early.
Research provided by e-Yield