By The Disciplined Trader
It feels like I have been sitting on the sidelines for far too long, figuring out what move to make next while the fragile market looks set to collapse at any time!
The mood has officially turned bearish, as recorded by the e-Yield Sentiment Indicator (see www.e-yield.com), hence it is likely we now face further downside risk ahead. At the same time the RSI dropped below the oversold level of 30 on the daily FTSE 100 chart but is now ticking back up.
This is a difficult scenario to trade from - the trend is down so I would like to sell but the sell-side trade is risky and my oversold trading rule will not allow this action. Therefore in order to catch a good trade I must continue to remain patient and wait for a confirmed trading signal. I’ll be looking to buy when the FTSE makes a new low around 5900 or sell after a big rally that takes us closer to 6400.
My reasoning is that if the FTSE makes a new low the RSI will probably return below 30 and potentially create a bullish divergence, this oversold condition would signal an ideal buying opportunity for a decent trade. If the FTSE rallies to 6400, the RSI can potentially reach overbought levels on the daily or 120-min chart. An overbought condition in a downtrend is a strong sell signal and would create a perfect set-up to position myself short with the prevailing trend.
I am in no hurry to trade because the FTSE is currently between these two levels, so I have to sit tight and wait, but I would favour a nice bounce higher to position myself short for the next leg down.
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