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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You've heard it all before:
Do you meet these qualifications, yet still struggle in the markets? If so, you may find some helpful advice in this quick trading lesson from Trader's Classroom editor, Jeffrey Kennedy:
We all know that the Elliott Wave Principle categorizes 3-wave moves as corrections and, as such, countertrend moves. We also know that corrective moves demonstrate a stronger tendency to stay within parallel lines, and that within A-B-C corrections the most common relationship between waves C and A is equality. Furthermore, we know that the .618 retracement of wave 1 is the most common retracement for 2nd waves, and that the .382 retracement of wave 3 is the most common retracement for 4th waves.
Knowing that all of these are traits of countertrend moves, why do traders take positions when a pattern demonstrates only one or two of these traits? We do it because we lack patience. We lack the patience to wait for opportunities that meet all of our criteria, be it from an Elliott wave or another technical perspective.
What is the source of this impatience? It could be from not having a clearly defined trading methodology, or not being able to control emotions. However, I think impatience stems more from a sense of not wanting to miss anything. And because we're afraid of missing the next big move, or perhaps because we want to pick up some lost ground, we act on less-than-ideal trade setups.
Another reason traders lack patience is boredom. That's because -- and this may sound odd at first -- "textbook" Elliott wave patterns and ideal, high-confidence trade setups don't occur all that often. In fact, I have always gone by the rule of thumb that for any given market there are only 2-3 tradable moves in your chosen time frame. For example, during a normal trading day, there are typically only two or three trades that warrant attention from day traders. In a given week, short-term traders will usually find only two or three good opportunities worth participating in, while long-term traders will most likely find only two or three viable trade setups in a given month, or even a year.
So as traders wait for these "textbook" Elliott wave patterns and ideal, high-confidence trade setups to occur, boredom sets in. Too often, we get itchy fingers and want to trade any chart pattern that comes along that looks even remotely like a high-confidence trade setup.
The big question then is, "How do you overcome the tendency to be impatient?" Understand the triggers that cause it: fear of missing out, and boredom.
The first step in overcoming impatience is to consciously define the minimum requirements of an acceptable trade setup and vow to accept nothing less. Next, feel comfortable in knowing that the markets will be around tomorrow, next week, next year and beyond, so there is plenty of time to wait for the ideal opportunity. Remember, trading is not a race, and over-trading does little to improve your bottom line.
If there is one piece of advice I can offer that will improve your trading skills, it is simply to be patient. Be patient and wait for only those textbook wave patterns and ideal, high-confidence trade setups to act. Because when it comes to being a consistently successful trader, it's all about the quality of your trades, not the quantity.
Developing patience isn't easy -- yet, if you are serious about improving the quality of your trades, it is vital.
How much more successful would you be if you could develop the patience to act only on high-confidence trade setups?
The S&P 500 Index rose on Wednesday, continuing the rally from the previous day’s session as Federal Reserve comments were treated as mildly dovish by stock market traders....read more
The index was unable to rally yesterday, despite the deep retracement. This time it was China’s stock market mini crash that sent shockwaves around the globe. I have warned many times that if the sell off in China continues, global stock markets will go down. The FTSE is ready to rally but we need to see an end to the Chinese stock market slide, at least temporarily. This would give a boost to the FTSE.
What is causing some concerns is the failure of the authorities to stop the slide. You will recall that China imposed a series of measure to boost the stock market. These don’t appear to be working, commodity prices are still falling and falling resource stocks are a drag on the FTSE. These events together with the recent mixed economic data will probably play a part in the Fed’s policy in particular in deciding whether or not to hike interest rates. At tomorrow’s FOMC meeting, the committee is likely to take a more dovish stance, this would be a positive development for the stock market.
After yesterday’s fall the retracement is large, the FTSE has retrace 80% of the July rally. Yet despite the China scare and the large retracement, everything is normal. The second wave of an upward zigzag can retrace a large portion of the first wave. Which means the forecast remains intact.
The July rally was wave a (circle), this move is an impulse wave which means the trend is up. This is not confirmed by the BTI (declining), in general the BTI should confirm the wave count, when the BTI is declining in general the trend is down. So we have a conflict between the wave count and the BTI. Furthermore the shape of wave b (circle) which is the current decline is not a clear zigzag in three waves. It looks like an impulse wave down. This is not ideal because an impulse wave down implies the trend is down.
For this reason I prefer to buy call options on the FTSE instead of going long the index. That way I can benefit if the FTSE rallies while risking little if the index declines. My preferred strategy right now is to short the index from higher levels as I believe the long term trend is down but in the short term the index could rally.
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If I have been consistently right on the direction of the markets this year it's not because I'm lucky (I'm not a lucky person). It's because I have worked hard over many years developing a strategy based on investor psychology.
I can tell you what investors are thinking right now...
I understand what causes the stock market to behave in a certain manner at a certain time.
I am confident in my forecast and analysis, that's why I am not afraid to make big calls as I did recently at the UK Investor Show. Back in April I said:
"maybe 7150 maximum... and probably a big correction to 6600" (FTSE 100). You can watch the video here:
I hope you are prepared for the next big move in the stock market. Will Greece tip stocks into the next bear market? or will it be the bursting of the Chinese stock market bubble? And what about US interest rates, will they go up? Another possibility could be a new threat coming from the East but very few people are concerned right now.
Stay tuned and if you need direction I invite you to subscribe to Better Trader Premium:
Until next time,
We started the week in positive mood after last week huge gains. Rising bond yields and Greek uncertainty has kept the stock market under a major resistance. The next leg should be down and we took a short position on FTSE 100 and S&P 500 this week.
We are neutral on EUR/USD and looking to enter shortly. This market has behaved exactly as the Elliott wave dictated. This year we have made 1022 pips on EUR/USD, see:
All my forecasts are based on Elliott wave analysis. This underlines why markets follow the Elliott wave.
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My own timing indicator, 13-day BTI is oversold (below -400). This timing indicator suggests the FTSE will bounce back in the next few days. When the indicator falls below -400 it means the index is oversold and in general there is a good chance the index will rally. The Top 20 Differential is not oversold but not far away, currently at -2.3%.
With no major news the index drifted lower yesterday, sentiment is bearish and there is a feeling that the Fed will raise rates in September. The economy is regaining momentum, and in Europe there are signs inflation is picking up. The worry is Greece and rising bond yields.
The FTSE has declined to a support area which is the area surrounding the 200-day moving average. The 200-day moving average is currently at 6748 and because the 13-day BTI is oversold, the area below 6748 becomes strong support. Another timing indicator, Top 20 Differential is near oversold, so we have many indicators pointing to a support.
Based on the wave count it does not look like the decline is in five waves, therefore we should see lower prices before we see a significant bounce. Yesterday’s decline to 6737 marks the bottom of wave (iii), however it’s also possible wave (iii) is not yet over in which case it will end slightly below that level. The next move should be a rally to 6840 for wave (iv) followed by a decline to 6650 for wave (v).
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The S&P 500 Index rebounded on Wednesday after sharp losses on Tuesday saw the CBOE Volatility Index (VIX) jump 16%.
In the end, all three benchmark indexes ended up closing higher, with the Dow Jones Industrial Average up by 0.67%, the Nasdaq up by 1.47%, and the S&P 500 up by 0.92%.
It was a day of steady gains for stocks as the S&P 500 moved consistently higher from Tuesday’s low, though the index did not manage to recover Tuesday’s losses completely.
Return to optimism
A number of factors helped push stocks higher on Wednesday.
First, there was a positive session in Asia which spilled over into European and American markets.The Shanghai Composite Index moved within a whisker of the 5000 level, as investors speculated over continued interest rate cuts from the Chinese central bank.
Second, there was renewed optimism in Europe as traders bet on a new agreement regarding the Greek debt situation. Greek policymakers were set to meet with the IMF late on Wednesday to thrash out a new deal ahead of $1.74 billion worth of scheduled payments.
Thirdly, continued activity in the mergers and acquisitions space has helped boost the attractiveness of riskier assets. TimeWarner Inc. was approached by Charter Communications on Tuesday in a $50+ billion deal and on Wednesday, there were reports of a buyout of Broadcom Inc. by Avago Technologies. If it were to go ahead, the deal would be the biggest ever in the semiconductor space. Shares in Broadcom Corp. rallied 21% as a result on Wednesday.
Technicals & Outlook
The S&P 500 advanced on Wednesday and closed right on the first resistance level. However, as mentioned the market was unable to recover all of Tuesday’s steep losses.
Over the next few days, we note that most technical indicators are now bearish, so we are looking to sell in the 2,120 - 2,134 range, for a potential move to 2,090. We are also bearish over the next few weeks.
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