The index was unable to rally yesterday, despite the deep retracement. This time it was China’s stock market mini crash that sent shockwaves around the globe. I have warned many times that if the sell off in China continues, global stock markets will go down. The FTSE is ready to rally but we need to see an end to the Chinese stock market slide, at least temporarily. This would give a boost to the FTSE.
What is causing some concerns is the failure of the authorities to stop the slide. You will recall that China imposed a series of measure to boost the stock market. These don’t appear to be working, commodity prices are still falling and falling resource stocks are a drag on the FTSE. These events together with the recent mixed economic data will probably play a part in the Fed’s policy in particular in deciding whether or not to hike interest rates. At tomorrow’s FOMC meeting, the committee is likely to take a more dovish stance, this would be a positive development for the stock market.
After yesterday’s fall the retracement is large, the FTSE has retrace 80% of the July rally. Yet despite the China scare and the large retracement, everything is normal. The second wave of an upward zigzag can retrace a large portion of the first wave. Which means the forecast remains intact.
The July rally was wave a (circle), this move is an impulse wave which means the trend is up. This is not confirmed by the BTI (declining), in general the BTI should confirm the wave count, when the BTI is declining in general the trend is down. So we have a conflict between the wave count and the BTI. Furthermore the shape of wave b (circle) which is the current decline is not a clear zigzag in three waves. It looks like an impulse wave down. This is not ideal because an impulse wave down implies the trend is down.
For this reason I prefer to buy call options on the FTSE instead of going long the index. That way I can benefit if the FTSE rallies while risking little if the index declines. My preferred strategy right now is to short the index from higher levels as I believe the long term trend is down but in the short term the index could rally.
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