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The 13-day BTI, a timing indicator, is no longer oversold which means the FTSE is not oversold and there is now potential for a large fall. Today the Chinese stock market is closed and the FTSE is down, this time the influence is coming from Japan where stocks are down 3%. The real influence is more likely to be the global slowdown. When sentiment is bearish, bad news is bad news. So yesterday when Mario Draghi announced that inflation had been downgraded and growth cut, that was the bad news and investors should have sold stocks. Instead they bought. Why? Because Draghi also announced some good news, an increase in quantitative easing to boost growth. Investors focused on the good news and not the bad and that was a mistake. In a period of bearish sentiment you should focus on the bad news, the unexpected rally after 1.30pm was an opportunity to sell.
Sentiment as recorded by my BTI has been bearish since mid August. As I said many times, inflation and growth will drop sharply in coming months, the stock market will plunge. I also said that investors will lose confidence in the central banks’ ability to stabilise the markets and the economy. We are seeing this new phenomenon right now. The announcement that the ECB will increase QE has failed to boost the stock market, the FTSE is down this morning. In the next few month or next year expect more of the same behaviour. Central banks and governments will intervene to stop the slide but this time bearish sentiment will be too strong. Bearish sentiment will grow with the slide.
Today we have another important announcement at 1.30pm, the nonfarm payrolls report. If the number is strong we will probably see a rally but upside is limited. The trend is down, any rally should be seen as an opportunity to go short. The previous resistance is 6248 where wave iv (circle) ended. Yesterday’s rally stopped below that level. If the wave count is right and wave v (circle) down is underway, the FTSE won’t stay too long above current levels.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
