The FTSE broke above the previous high (6612.2) an indication that the fifth wave up is underway. The FTSE was helped by Wall Street recording a new all-time high and receding political uncertainty in the UK. We now have a new PM but there is still work to be done with the EU. Furthermore the market was boosted by expectations that the Bank of England will announce more stimulus on Thursday.
Well, I won’t comment on stimulus because it is like a magic wand, we know it’s a trick but it works. Meanwhile the earnings season is underway and as always we can’t say if earnings will beat estimates but the market tends to rise during the earnings season.
This time however, and because the market has shot up in the last two weeks, the FTSE is already overbought based on the Top 20 Differential and 13-day BTI. When these two indicators are overbought the probability of a decline is high.
As you can see there is lots of positive for the market to continue to rise but at the same time the market has gone up too fast and the FTSE is overbought. In that situation you want to go long but after a decent pullback as it is not recommended to buy an overbought market.
The rally from the post referendum low is wave A in five waves [i,ii,iii,iv,v (circle)] and we are now in the final wave up [wave v (circle)] and the indicators are overbought. This is why it is not the ideal time to go long. The time to go long will be after wave B, sometimes in the next two weeks. Here we have a medium term rally in three waves [A,B,C], the next move after wave B will be wave C up. The target is near 6900.
Today we have the nonfarm payrolls report (NFP) at 13:30, this could shake the market and if the number is weak the FTSE will drop to 6460. As always it’s not recommend to trade ahead of the report if you have a tight stop loss. While sentiment is bullish and the lower pound has boosted the earnings of FTSE 100 companies, there are risks from the fallout of Brexit and from China where the Yuan is falling and I believe once the current rally is done the bear market will resume as investors will turn negative on the global economy. The fragile economic recovery has been derailed by Brexit, furthermore the Yuan has fallen sharply in recent months but investors have ignored the warnings. You will recall the low Yuan caused the stock market sell off at the start of the year, well the Yuan is lower and making new lows. Something to watch.
Sentiment is bullish judging by the strength of the rally post Brexit. Rallies of this magnitude will impact sentiment, the longer and the stronger the rally, the more bullish people become. The rally has taken many by surprise including me, the actual cause is not clear but I suspect it’s a combination of factors including short covering.
The fundamentals have deteriorated, stimulus is back, furthermore I suspect a very large proportion of investor took short positions post Brexit well below the top as they did not believe the FTSE would go back up. When the FTSE rallied they had to cover theirs shorts and if we are talking about a large number of orders this will fuel the rally.
But the fundamentals are worse than they were pre Brexit so I suspect the downtrend will resume. Sometimes the market will produce some weird moves that not many people expect, fortunately these weird moves don’t occur very often but we have to live with them. The question now is, will the decline resume below the previous high (6380.5) or will the FTSE rally to 6600 before the decline start?
The day before the referendum I predicted a rally to 6600 prior to the bear trend resuming, this is still a possibility. But right now the high at 6380.5 remains intact, as long it remains intact we cannot rule an immediate decline and a resumption of the bear market.
But if the FTSE breaks above 6380.5 the FTSE is expected to climb to 6600. This scenario is possible because sentiment has turned bullish and the pattern on the S&P can be interpreted as the start of medium term rally. In any case the rally won’t be in a straight line because it’s a zigzag [A,B,C] which means when the current rally which is wave A is complete we should see a deep pullback to the 6100-6200 area for wave B, followed by a rally to 6600. This only applies if 6380.5 is broken.
We can never guarantee a profit when trading, but if you trade options the way I do you are nearly guaranteed a profit. The key is to find opportunities when the chance of making a profit is high and the risk of losing is low. To do this I will short the FTSE 100 future or cash and add some call options as a hedge. Or I will sell call options when my analysis tells me the FTSE 100 is near a top.
The strategy has produced 1565 pts in the last 14 months (or 112 pts per month). Here is a guide explaining my call option strategy:
After last Friday strong rally, the FTSE closed down yesterday. It seems the rally is running out of steam. Same thing in the S&P 500, I was expecting a rally near 2070, but the highest level yesterday was 2055 and the index closed down.
Today the indexes are lower in pre-open, it would appear that the counter trend rallies are complete. Beside the wave count, stock markets have limited upside in the next four weeks mainly as a result of the uncertainty surrounding the referendum in June. Fear of Brexit will keep investors on the sidelines. This means, and as we move into June, the sellers will outnumber the buyers and chances are the stock market will move down.
Yesterday the Prime Minister warned of a DIY recession if Britain leaves Europe. Whether he is right or not, his comments will not re-assure investors. In addition talks of higher interest rates in the US will add more pressure on stock markets. Therefore there is a good chance the high at 6216 will remain intact.
This level is the top of wave 2 of a five-wave decline. From that level the FTSE declined below the 55-period moving average (on the 90-min chart). The index is now back above the 55-period moving average. In a bear trend a move above the 55-period moving average is a sell signal, so the decline should resume. Alternatively wave 2 is not yet complete and there will be another move up above 6216 before the decline resume. That is because wave 2 retraced less than 50% of wave 1, in general a second wave retraces 50% or more of the first wave.
Trading Strategist Thierry Laduguie has had great success trading the FTSE 100 and options. Our members are up 1644 pts or +164% in the last 13 months. "FTSE 100 and options are the best markets to trade" he says. To become a member subscribe to Better Trader
The best markets to trade are FTSE 100, options and EUR/USD. In total +2160 pts in the last 13 months. If you bet £1 per point per £1000 in your account (which is what I recommend) you triple your money every year!