The FTSE made a new low yesterday, in the process Top 20 Differential dropped below -2.5%, this means there is an increased probability that the FTSE will rally. When the top 20 Differential is below -2.5% the blue chips are oversold and in this situation they will bounce back. Blue chips seldom stay too low for too long, bargain hunters will move in. But the bounce won’t last because it’s the final leg of the triangle.
Yesterday we saw another disappointing economic report from the US. The NY empire state manufacturing index came in well below the number predicted by analysts. This weighed on sentiment in Europe. In the US however stock markets moved up as the weak data is friendly to interest rates.
There is a clear divergence between the FTSE 100 and the S&P 500, the S&P is moving up but not the FTSE. This is unusual but it can happen because the FTSE is highly dependent on oil and mining stocks and because the sectors are going down the FTSE is being held back. As a result we could see S&P hit its target but not the FTSE.
There is a chance the FTSE will struggle to move above 6620, unless oil and mining stocks start to outperform. For this reason I am not keen to go long, I prefer to go short from higher levels. I believe that upside potential is limited while downside potential is considerable.
The decline extended to 6507 yesterday, this level is above the bottom of wave b (circle) so the triangle remains intact. Weakness in resource stocks has pushed the Top 20 Differential to oversold, as I said these stocks should bounce back and push the FTSE higher. The decline to 6507 is wave d (circle), this move is complex like a double zigzag [(w),(x),(y)]. The next move should be wave e (circle) and it’s not clear where this move will end, I suspect below the resistance line drawn from the tops of wave a (circle) and c (circle).
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