Once again we saw another drop in crude oil and the FTSE 100 followed lower. Historically there is no correlation between oil and stocks but from time to time the FTSE and oil move in the same direction. Bearish sentiment was the key driver yesterday following disappointing results from BP. At one point the stock was down 8%, this is one of the largest companies on the LSE, a drop of that magnitude will drag the FTSE lower.
It’s difficult to predict what will happen to the oil price in the short term. Any sort of OPEC deal to cut back on production is expected and that is why oil rallied last week. But in the absence of fresh news hopes are fading and oil is going down again. This morning’s better than expected Chinese caixin services PMI is good news for stocks, this should also help oil rally. Yet the FTSE is trading lower in pre-open following last night slump on Wall Street.
Yesterday’s sharp decline indicates that the rally is over, I don’t expect the FTSE to return to 6115 which is Monday’s high. I was expecting a higher level because the pattern inside wave ii (circle) did not appear to be complete. Now we can say the pattern is complete but not textbook. The first part of the rally looks impulsive [wave (w)], the second part [wave (y)] looks like a double zigzag. Wave ii (circle) retraced more than 62% of wave i (circle) and the resistance line at 6125 remains intact. There is a good chance wave ii (circle) is complete. Yesterday’s decline is the start of wave iii (circle).
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