The BTI was unchanged yesterday. The strength of the rally has boosted the bullish mood which is what you would expect after a long rally. The more the market rallies the more bullish investors become, this is why, when we see a bearish divergence (declining BTI, rising FTSE), the FTSE must decline soon otherwise if it does not, sentiment will turn bullish and the rally will extend.
This is where we are now, the rally has lasted too long and the BTI is no longer declining but it has yet to turn up. The 34-day BTI is still declining so before we turn bullish both BTI and 34-day BTI must be rising. While we are waiting for the indicators to turn bullish, we must not be fooled by the rally. The rally this month is not powerful because the fundamental data is improving, it is powerful because there are too many people doing the same thing i.e. buying at the same time.
As I said, we are in a period of first degree extreme in bullish sentiment. During this period the level of bulls is at record high so when the market declines sharply as it did in January, a small percentage will buy near the low but the majority will buy in the middle of the rally or near the end. These buyers are not smart or clever they are simply herding. In the meantime they have the power to push the market back to previous highs in a short period of time.
In a first degree extreme in bullish sentiment a rally that starts from oversold levels can be powerful. In this situation it is recommended to go short from high levels and not too early in the move. Whether or not sentiment turns bullish, the rally has been driven by the herd of bulls, once they are all invested we should see a decline.
I believe that 90% of bulls are invested at this stage of the rally which appears to be a counter trend move in three waves [(a),(b),(c)].
The bottom line is that there is nothing fundamentally sound to justify this rally, therefore I am confident a sell off is around the corner.