Last week’s decline has taken its toll on sentiment, but the trend in the FTSE is still up. The UK index closed down on four consecutive days and is now in a support area, a rally is imminent. Weakness in metal prices and mining stocks contributed to a negative finish on Friday, and Bank of England Governor Carney added pressure on stocks after saying that the central bank is still on track to raise interest rates despite subdued inflation. Fed Chair Yellen also said that US rates would likely start rising later this year but the pace of tightening would be data-dependent.
April is a positive month for stock, but the period from May to September is not the best period to hold stocks, so from May seasonal influence is not in favour of a rally. This year we have conflicting signals between rising interest rates in the UK and US sometime during the summer and deflation spreading in Europe. All this is negative for the stock market. Furthermore we have the UK general election in May, another reason to be cautious. For these reasons upside is limited this year, the FTSE may rally to 7100 to complete an ending diagonal, that is the best level we will see in 2015 I believe.
Last week sharp pullback was too deep to be labelled a fourth wave, the FTSE retraced 62% of the previous rally. In general a fourth wave retraces a small portion of the third wave. This means the pullback was the second wave inside wave 5. In an ending diagonal the norm is to have three waves inside wave 5, if the rally to 7065 was the first wave and the current decline is the second wave, the next move will be the third wave up. For this rally to unfold properly it would help if sentiment could turn bullish. I expect the BTI to turn up as the rally unfolds.