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The FTSE is falling again this morning after China allowed the yuan to fall for the second consecutive day. In a desperate move to boost its economy China acted a second time, an indication that the devaluation process is underway and we could see further falls versus the Dollar in the near term. Desperate is not a word we welcome, it is associated with trouble. China has already used many tools to stabilise its economy and its stock market, so far nothing appears to have worked.
I have warned many times that when a bear market is underway, nothing will stop it. Government and central bank intervention can stabilise the market temporarily but in the end the bear market will resume. This process of stabilisation can last many years as we have seen in the US. The Fed’s stimulus program started after the financial crisis in 2008, the stock market has recovered but the economy is still weak to the point where the Fed is still unsure whether to hike rates or not.
The next phase will be a sharp and long lasting decline in the stock market as sentiment turns bearish, it will be so powerful that the economy will suffer and the Fed will never raise rates. The bottom line is that if you try to stop a bear market, whether it takes one year or ten years, the bears will come back with a vengeance.
Meanwhile the fall in the Yuan will make Chinese products cheaper for export but it will hurt metal prices and mining stocks. If mining stocks decline the FTSE will be dragged down and that’s what we saw in the last few days. How far can the decline go? I am not sure, based on the pattern it appears that the index is tracing out a triangle [a,b,c,d,e (circle)] for wave 2.
The current decline is wave d (circle), the next move should be a rally to 6700 for wave e (circle). Thereafter you can imagine what will happen. I can’t predict what will happen in the world but based on the Elliott wave pattern, I can see a massive move down in the short/medium term as the index is approaching the start of a third wave down.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
