Before I tell you about money management and risk/reward let me show you why the latest rally to 6900 was an important move. The previous high (6905) was recorded in September last year. If the FTSE 100 fails to break above that level we will have a double top with devastating consequences.
You see there are two ways to interpret the latest rally.
It could be an impulse wave up and in this case the stock market will rally again. But it's not clear because since last week we had a series of positive announcements and the stock market is not responding. Last week the ECB announced QE yet the FTSE and S&P are trading below the levels post announcement. Then on Tuesday Apple announced record results and yesterday's FOMC statement was as expected yet the stock market declined.
When the stock market fails to rally on good news sentiment is bearish. Right now the BTI is till rising but it feels like sentiment will turn bearish in the short term. On the chart above the current decline is wave iv (circle) and once this decline is over the FTSE should rally to complete wave v (circle). But the key level of 6905 remains intact and as long as it remains intact there is a possibility the rally was wave 2 as shown on the alternate wave count:
If the rally was wave 2, the decline in the FTSE will continue because the next move is wave 3 down. This is a long term decline with a target near 5500. Given the potential downside risk it is not recommended to go long (except if you trade intraday). We need to see what the S&P 500 will do before taking a firm view on the next move. The US index is near a key support, if broken the stock market could plunge.
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Until next time,