The FTSE finally broke down yesterday, there was no support and the decline carried the index below 6900. There was no real reason behind the decline, simply profit taking. After a good run people will take profit, this occurs after five waves up.
The economic news was mixed. In Europe German retail sales data was strong but producer prices fell at an annual rate of 3.4%. I suppose this could have been the reason behind the decline, the threat of deflation is rising. Investors also could remain cautious ahead of the nonfarm payrolls report on Friday, this is an important report that could give us some clues about the timing of the Fed's interest rate hike. A hike is expected before the summer, however a strong report would precipitate a rise in interest rates. This would be negative for the stock market.
With stocks at multi-year highs investors are quick to take profits. Yes, a new high is always welcome and in general this will attract new buyers but in the current environment of rising interest rates in the US, deflation in Europe, slowdown in China, instability in Ukraine and Libya investors will be quick to take money off the table after a decent run. This is where we are now.
This profit taking pattern can lead to an ending diagonal pattern as each rally leg does not unfold properly. I believe this pattern is unfolding on the S&P, while on the FTSE the pattern appears to be an impulse wave up [1,2,3,4,5]. But if wave 4 ends below the top of wave 1 , the pattern will become an ending diagonal. At the moment wave 3 is in five waves [i,ii,iii,iv,v (circle)] and the next move is wave 4 down. The first support is above the top of wave 1 (impulse wave) near 6800, the second main support is on the 200-day moving average at 6689, in the case of an ending diagonal. Wave 4 is likely to end between those two levels.
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