FTSE 100 Trading: Sentiment Analysis Points to Further Gains

Michael Hewson of CMC Markets today writes:

“Combine that (net retail sales Q4 number fell back to 1.1%) with hawkish comments from new FOMC voting members Charles Plosser and Richard Fisher with respect to further cuts to monetary stimulus and fairly indifferent earnings releases from JP Morgan Chase and Wells Fargo and you wonder what has driven the moves of the last couple of days”

The move of course was up, the FTSE 100 is now trading near 6,800, a levels last seen in October 2013.

Many people do not look at sentiment in their analysis, that’s why they are puzzled when the stock market goes up on bad news.

If you wonder what has driven the moves of the last couple of days, check sentiment. The truth is, a rally on bad news is the result of an increase in bullish sentiment. In my view the rally of the last few days has been driven by bullish sentiment and I can show you this on the chart below. One of my sentiment indicators (34-day BTI) recorded an extreme in bearish sentiment of second degree on 20^th December when the indicator fell below -400:

 

 

When this indicator falls below -400 the FTSE 100 is about to rally so in this situation traders should close short positions and prepare to go long. The FTSE rallied in the last ten days of December, then prices moved sideways during the first half of January. In the meantime sentiment turned bullish on 27^th December as recorded by my indicator, and has remained bullish ever since.

Therefore I am not surprised to see the FTSE 100 going up on the back of disappointing news. Sentiment analysis is the most powerful form of analysis to predict the short term direction of the FTSE 100 index. The next target is 6,850.

Thierry Laduguie is FTSE 100 Trading Strategist at www.e-yield.com

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