So far today we have a weak FTSE 100 confirmed by the firmer GBP/USD and the weaker S&P 500. If I look at the Dax 30 it looks like the Dax will decline too in three waves similar to the previous decline. This pattern could be an expanding triangle. However the pattern is not very clear, it can be interpreted differently.
The pound gave a few false signals recently but the latest break below a support area near 1.2380 is a clear indication the decline will extend. The pattern is an impulse wave [(i),(ii),(iii),(iv),(v)] and we are now near the bottom of wave (iii). Expect a bounce to the 1.2340 area followed by a decline to 1.2250.
As I write GBP/USD is pushing back to 1.2500, we could be at the start of a larger move to 1.2700. The pound has been trading sideways for a while, this kind of move is generally a pause in the main trend. If we assume that the trend is up (the rally from the low in January), the uptrend is still in place and the rally is about to resume.
The reason I question the next move is because there are two ways to look at the triangle. In terms of Elliott wave analysis, sometimes the pattern is not clear, for example where did the previous rally ends? This rally is in five waves, however, did it end at 1.2673 [top of wave v (circle)] or at 1.2700 [top of wave b (circle)]? The end of a five-wave rally is followed by a decline in three waves so if rally ended at 1.2700, the decline to new lows in February is the first leg of a larger correction and the triangle is the second leg. This imply a decline for the third leg.
The problem with this scenario is that while the rally to 1.2700 can be counted in five waves, on my charting application the previous decline which is the fourth wave touched to top of the first wave. This is called “overlap” which is not possible under Elliott wave rules. In an impulse wave the fourth wave cannot overlap the first. Therefore the rally ended at 1.2673, that level is the top of wave v (circle).
The corrective wave is in three wave [a,b,c (circle)] as you would expect in a counter trend. Based on the Elliott wave pattern the rally from the low in February is the start of the next five-wave rally, this move is wave i (circle) and the triangle [(a),(b),(c),(d),(e)] is wave ii (circle). This suggests we are now in wave (iii) up to 1.2700. Such a move would be a drag on the FTSE 100 and if the S&P 500 pulls back as well, the FTSE 100 could decline back to 7200 or lower in the short term.
The FTSE is rallying because it's near oversold and investors expect a decline in the pound. The stock market is forward looking, it does not matter what the pound does now, what matters is what it will do tomorrow / next week...read more
I note a near perfect negative correlation between GBP/USD and the FTSE 100. It seems the direction of the pound is more important than the direction of the S&P 500 when it comes to forecasting the FTSE 100. I'll analyse the pound then... read more
The rally extended once again, this time the FTSE 100 was boosted by rising oil prices and a declining pound. With regards to the most probable scenario nothing has changed, the wave count together with the indicators point to a short term decline.
I mentioned that the FTSE was strong despite the declining oil price, this occurred because the GBP/USD was declining. When the pound goes down it boosts the profits of FTSE 100 companies. If earnings improve due to the exchange rate, valuations will go up and the FTSE 100 will go up. So when oil rallies as well you get a double boost. Oil is not the issue because it won’t jump to 60 or 70 in a matter of days or weeks and to a certain extent it’s the same thing with the pound, it won’t collapse once again. We had the bulk of the decline after the referendum and now I expect some smaller fluctuations so I think when people use the price of oil and GBP/USD as an excuse to buy FTSE stocks I think it’s for the wrong reason and the rally in the FTSE is now overdone.
They forget that China is slowing, for example today’s Chinese industrial production was lower than expected. What’s going on in China is more important than the pound because if a UK exporter earn more selling to China because the pound is lower, this UK exporter could earn a lot less if China goes into a recession.
Watch this quick educational video from an Elliott wave forex expert, Jim Martens. Last fall, the editor of Elliott Wave International's Currency Pro Service, Jim Martens, observed a beautiful pattern in the chart of the Japanese yen. Upon its completion, this pattern offers a very clear outlook for the market. Read more.