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Today’s re-test of the 21st August low at 6386 is not a positive development. Chances are the decline will continue but not before we see a decent counter trend bounce. I say this because the FTSE is oversold as indicated by my own timing indicators. In addition the 34-day BTI is oversold too. When the indicators are oversold the odds favour a rally. We should see a counter trend rally in the short term. Here is the chart of the 34-day BTI:
The 34-day BTI does not fall below -400 very often but when it does the FTSE tends to rally in the short term. The indicator fell below -400 three times in the last two years. On the two previous occasions the FTSE rallied. Of course this forecast is purely based on past patterns and we cannot be certain that this time the market will rally. The next hurdle to clear is the looming debt ceiling deadline in mid October. If US lawmakers don’t come up with an agreement in the next two weeks investors will panic and stock markets will go down. There is enough time for a rally though, what we could see is a rally before the 17 October deadline.
With regard to the short term forecast, there are two possible scenarios:
On the daily chart the retest of 6386 could be wave (b) of a smaller bearish triangle (descending triangle), one that will form wave ii (circle) of a five-wave decline. In this scenario the FTSE will rally to 6600 in the next few days to complete wave (c), then it will be down again to 6390. The second scenario is shown on the following chart:
Because sentiment is bearish, the bear trend that started in May could be resuming. In this case today’s decline is wave (i) and the next move in the next few days will be wave (ii) up to an area near 6500. Thereafter the decline would resume. As you can see in both scenarios, we should see a rally to 6500 or higher. These two wave counts suggest that the trend is still down and any rally will be counter trend. The downside potential is substantial especially in the second scenario.
Thierry Laduguie is Market Strategist at www.bettertrader.co.uk
