So far today we have a weak FTSE 100 confirmed by the firmer GBP/USD and the weaker S&P 500. If I look at the Dax 30 it looks like the Dax will decline too in three waves similar to the previous decline. This pattern could be an expanding triangle. However the pattern is not very clear, it can be interpreted differently.
The pound gave a few false signals recently but the latest break below a support area near 1.2380 is a clear indication the decline will extend. The pattern is an impulse wave [(i),(ii),(iii),(iv),(v)] and we are now near the bottom of wave (iii). Expect a bounce to the 1.2340 area followed by a decline to 1.2250.
As I write GBP/USD is pushing back to 1.2500, we could be at the start of a larger move to 1.2700. The pound has been trading sideways for a while, this kind of move is generally a pause in the main trend. If we assume that the trend is up (the rally from the low in January), the uptrend is still in place and the rally is about to resume.
The reason I question the next move is because there are two ways to look at the triangle. In terms of Elliott wave analysis, sometimes the pattern is not clear, for example where did the previous rally ends? This rally is in five waves, however, did it end at 1.2673 [top of wave v (circle)] or at 1.2700 [top of wave b (circle)]? The end of a five-wave rally is followed by a decline in three waves so if rally ended at 1.2700, the decline to new lows in February is the first leg of a larger correction and the triangle is the second leg. This imply a decline for the third leg.
The problem with this scenario is that while the rally to 1.2700 can be counted in five waves, on my charting application the previous decline which is the fourth wave touched to top of the first wave. This is called “overlap” which is not possible under Elliott wave rules. In an impulse wave the fourth wave cannot overlap the first. Therefore the rally ended at 1.2673, that level is the top of wave v (circle).
The corrective wave is in three wave [a,b,c (circle)] as you would expect in a counter trend. Based on the Elliott wave pattern the rally from the low in February is the start of the next five-wave rally, this move is wave i (circle) and the triangle [(a),(b),(c),(d),(e)] is wave ii (circle). This suggests we are now in wave (iii) up to 1.2700. Such a move would be a drag on the FTSE 100 and if the S&P 500 pulls back as well, the FTSE 100 could decline back to 7200 or lower in the short term.
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
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.
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.
This morning I predicted a FTSE 100 decline, this move is now underway.
The wave principle is a powerful analysis tool to forecast intraday, short and long term moves. Take the chart below. Last night I warned that the FTSE 100 would undergo a severe correction today.
That is because Trump victory in the US election marked the start of a five-wave rally which is wave i (circle). The decline I expected is wave ii (circle), currently underway. You can't see the five-wave structure inside the rally on the chart but if you take a 15-min chart you will see five waves inside wave i (circle).