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My sentiment indicator remains bearish but the stock market is now near a bottom. On the chart below we can see a support line crossing 6615, according to basic technical analysis, there will be some support above that level. The decline accelerated yesterday after concerns emerged about the financial health of Portugal ‘s top listed bank and France’s industrial output dropped 1.7% compared to a forecast of for a 0.2% increase. Europe is in trouble again, that’s why investors are taking money off the table. But it’s a bull market, and in a bull market bad news provides an opportunity to buy low. Don’t be surprised if the stock market rallies to new high in the next few weeks.
Some timing indicators like the 13-day BTI and Top 20 Differential are not yet oversold which means there is room for the decline to continue, but the Elliott wave pattern appears to be complete or nearly complete. There is now a good chance the FTSE 100 will rally again in three legs . Why in three leg? Because this has been a regular pattern in recent months:
The latest decline is in three legs w,x,y (circle). The sharp drop in the FTSE over the last few days will attract buyers, for this reason it is too late to short this index. Furthermore the FTSE is in a support area below the 200-day moving average, many investors will buy at these levels. What is not clear is where the decline will end. Yesterday’s low at 6643 could marks the end of the decline, however the S&P 500 has yet to complete its own decline, another wave down in the S&P would drag the FTSE lower and near yesterday’s low. For this reason it is possible the FTSE will return to 6640 or lower today or Monday.
Sometimes the final subdivisions of the decline will extend, in this case downside is limited, the decline should end above the lower line currently at 6615. A break below the line would be bearish, these kind of sideways moves in three legs can lead to a massive selloff, this is why a break below 6615 could trigger a sharp move down to 6100. As long as this level remains intact chances are the FTSE will rally over the next few weeks.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
