Today we have some positive news and stock markets are rallying. Japanese stocks are up 5 percent after the Bank of Japan surprised the markets with fresh stimulus. European markets are surging and US stocks look like they will make a new high. These actions by central banks are unpredictable and they boost the market, this is why you have to be strict with your stop loss (if you are short).
Now, we have to ask the question: why does the global economy need more stimulus after so many years of intervention? The answer is simple, the money has gone into assets like stocks and property and not in the real economy. This is why the economy is still struggling and asset prices are rising. And this is why investors will lose confidence in the central banks, when this happens the stock market will crash.
Right now this latest intervention is pushing the FTSE higher, I believe this move is temporary and the rally will be completely retraced. The Fed stopped buying bonds but they also know that the economy is weak, that's why they pledged to keep interest rates low for an extended period of time.
The rally may continue early next week but I would not be surprised if the FTSE turns down next week to retest the previous low.
Going forward I think people will lose confidence in so called stimulus programs, the day of reckoning looms. More importantly the UK stock market is leading the way. The completion of a long term ending diagonal in October signalled the start of a bear market. Commodities are down, oil is down, stocks in the UK are down, we are now waiting for the US stock market to turn down.
The trend is likely to reverse when the risk of a trend reversal is High. A breach of a key reversal level implies a neutral position.
Research provided by e-Yield