Relief Rally Should Drive The FTSE 100 Higher In The Short Term

The FTSE is up more than 200 points from the recent low, one of my sentiment indicators is still declining. This bearish divergence should disappear and I expect sentiment to turn bullish to confirm the uptrend. But right now volatility is picking up and this will continue until we have an agreement on the debt ceiling. Whatever the decision,  it will come today or tomorrow. Until then, expect the FTSE to go up and down without logic, any decision to trade should be made with caution.

The ideal pattern based on the wave principle is a decline followed by a rally near the previous high. If we believe US politicians, it looks like the announcement will come tonight. Remember the fiscal cliff in 2012? US lawmakers agreed a deal in the last hour before the deadline. In the meantime the government shutdown is hurting the economy, Fitch put the US on notice of a downgrade in its credit rating.

 

A potential downgrade should scare investors, but at the moment it does not look like investors are worried. I should say a small proportion of investors who are risk takers. Most sensible investors are sitting on the sidelines and waiting.

The FTSE is back above the 50-day moving average, on the daily chart the Directional Movement indicator has turned up which means the trend is up. Yesterday’s rally to 6569 was the final leg up inside wave (i). With prices well above the 55-period moving average and the debt ceiling deadline approaching, the next move could be a fear reaction [wave (ii)] ending near 6460 before the announcement.

But in the current environment where the market is driven by US politics, there is no guarantee the FTSE will pull back and for this reason I do not recommend to short this market. If the market pulls back then we will consider going long. Any pause or pull back should lead to a rally to 6630 or higher in the short term, this will be the relief rally and that is  the most likely scenario.

Thierry Laduguie is Market Strategist at www.bettertrader.co.uk

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