The FTSE is rallying because it's near oversold and investors expect a decline in the pound. The stock market is forward looking, it does not matter what the pound does now, what matters is what it will do tomorrow / next week...read more
I note a near perfect negative correlation between GBP/USD and the FTSE 100. It seems the direction of the pound is more important than the direction of the S&P 500 when it comes to forecasting the FTSE 100. I'll analyse the pound then... read more
We have seen this scenario many times, the index rises day after day, week after week and investors becomes more and more bullish. The more the FTSE 100 rises, the more they become bullish. But when bullish sentiment reaches an extreme, it's the top. Our indicator, 34-day BTI measures this extreme in bullish sentiment...read more
Sentiment is bullish but the FTSE 100 has become overbought on my timing indicators (13-day BTI and Top 20 Differential). A pullback lasting more than one day is expected to relieve the overbought condition. What is not clear is whether this pullback will start now or after the rally to 7240.
In the US the rally is running out of steam, the S&P 500 is struggling to make a new high and the Dow has yet to pass the 20K mark. This does not means there won’t be a final rally to new highs, but if there is a rally it will be relatively safe to go short. US markets need to pullback 2 or 3% before rallying to new highs.
Yesterday’s ADP employment report was disappointing, only 153K new jobs added in December, down sharply from the 215K in November. This report is often seen as a benchmark for the nonfarm payrolls report which is due today at 1.30pm. Analysts expect 178K new jobs, if the ADP employment report is anything to go by, today’s nonfarm payrolls will be disappointing and the market could sell off.
We continue to see a strong FTSE relative to the S&P. I believe the FTSE is supported by mining and oil stocks and expectations the pound will drop further in the weeks ahead. It’s all to do with Brexit, the UK is expected to leave the EU at the end of March but there is no deal with the EU, as long as there is no deal between the UK and the EU the pound will drift lower.
The pound will only rally if an agreement is reached or if the economic data in the UK is strong vs the US / EU data. For example yesterday’s UK services PMI beat forecasts and the pound rallied but what we are seeing now is strong economic data coming from the US and the EU, this does not help the pound.
It seems the period of low growth in the EU is over, manufacturing and services PMIs have been growing strongly in line with the UK data. In this environment I expect the FTSE to make new highs (after a short term pullback). The rally is wave C in five waves [i,ii,iii,iv,v (circle)]. Today the FTSE is expected to trade in the range 7140-7200.
The FTSE closed up on the last trading day of 2016 and recorded a new all-time high. I always say that it’s not a good idea to short the index in December, unless we are in a bear market. The bear market has been delayed, and it looks like there will be more upside before the bull market ends.
Last month however, the Santa Claus rally was unusual, the FTSE was very strong relative to the S&P. As noted the FTSE is at a new all-time high but the S&P is more than one percent below its all-time high. This morning I wrote "the rally will probably extend because the S&P is in a fifth wave up and is expected to make a new all-time high". Well I predicted the rally to 7200 last week, see Download FTSE Short Term Forecast 161230
Now I think the FTSE rally has further to go, there is more upside before we go down to 6900. So I have a new short term forecast. I think 2017 will be an excellent year to short the FTSE 100. To receive regular analysis and trading signals on the FTSE 100 subscribe to the FTSE 100 short term forecast
After the Italian referendum, attention will turn to the banking sector where Italian banks are vulnerable. Many Italian banks have never recovered from the last financial crisis, they are trading at multi-year lows and they are struggling with bad debts. They are in need of refinancing but the uncertainty caused by the no vote will make it more difficult to raise finance.
If Italian banks collapse this will affect banks in the UK and the US. Nevertheless, UK banks were firmer yesterday, an indication that the market is resilient in the face of the no vote. In a scenario similar to Brexit, the market has brushed aside bad news, this tells me that sentiment is changing to bullish. Bullish sentiment would make sense at this time of the year, seasonal influence is positive, yet the wave count does not agree with an immediate rally. Wave counts both in the US and UK suggest more downside before the rally starts.
Sometimes the market discounts bad news and rallies after the event. We could be in that situation. Last week decline occurred on fear of a no vote, now the referendum is over people moved back into position. Yesterday’s rally to 6799.5 carried higher than expected but this is a normal move because it’s a second wave and second waves retrace a large portion of the first wave. Today we have support near 6680. The FTSE should trade in the range 6680-6760.
Wall Street continues to make new highs and today we have two important announcements, the Autumn Statement from the Chancellor at 12:30 and the FOMC statement at 19:00. Volatility should pick up this afternoon and we could see some sharp intraday moves so stop losses will be at risk.
Tonight, the message from the FOMC statement will probably be that of a committee ready to hike rates in December. It would appear the market has already priced in a rate hike. Furthermore today is the day before Thanksgiving so the mood will be positive tonight, at a time when the S&P is expected to pullback. US markets will be closed tomorrow and they will close early on Friday.
I am not saying the S&P won’t pullback but in general the market tends to rise during Thanksgiving, similar to Christmas. The question now is, will the pullback occurs before or after Thanksgiving? Given the positive seasonal influence the pullback is more likely to occur next week.
The FTSE rallied above the recent trading range, the sideways move is broken and the direction is up but for how long? The FTSE has been the laggard, I don’t think it has the strength to catch up with the S&P. We could see a move to 6900 at best, the rally is wave (c) and this move could end anywhere in the range 6850-6900.
The expected pull back in the S&P will coincide with wave (d) down in the FTSE. As you can see the timing of the pullback in the FTSE will coincide with the timing of the pullback in the S&P. If the S&P pulls back early next week, chances are wave (d) down in the FTSE will be delayed. The FTSE is tracing out a triangle [(a),(b),(c),(d),(e)] for wave iv (circle). This could be a descending triangle where wave (d) will end near the bottom of wave (b), wave (b) ended at 6709. In this case the next move is down to that level.
We continue to see resistance above 7050, the FTSE 100 rallied to 7067 yesterday before pulling back. The sharp pullback we saw occurred at a time when BoE governor Carney was speaking. I think investors concluded that the Bank of England won’t lower interest rates and further stimulus is unlikely.
This disappointment was followed by a soft earnings report from Apple (NASDAQ:AAPL) in after hours. The FTSE is now below 7000 which was a support area near the lower line of a rising wedge. The S&P 500 is really struggling to go up, as time passes the odds of an alternate wave count have increased significantly. Time is important because according to the pattern the S&P is in a third wave up, this means the rally should accelerate but so far this is not happening. As I said US investors are probably not active ahead of the presidential election. In this case the US index will continue to trade sideways until the second week of November.
The FTSE is weak for a different reason, it seems UK investors are taking money off the table in anticipation of bad news next year, also because they have made some good gains since June. I suspect the rally in the FTSE ended at 7129.8 and we are now at the start of a long term decline.
Yet sentiment is still bullish, which is not consistent with a decline. But this could change, the BTI nearly turned down two days ago. But failure to break above yesterday's high and continued weakness in the S&P does not inspire confidence in a rally. The rally is probably over.
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