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The FTSE 100 has not yet resumed its decline but it is also struggling to extend its current rally above 6400. The rally from the September low is in five waves, a pullback is the more likely scenario in the short term.
We have had some mixed economic data coming from China and the US. Chinese GDP was higher than expected but industrial production was lower than expected. A strong service sector and robust consumption are helping offset weakness in manufacturing and exports. Chinese stocks have recovered in the last two months but this could be a dead cat bounce. Questions remains about the health of Chinese stock market. When a bubble burst it’s never a good idea to get back into the market too early.
Stock markets have been driven by the belief that US interest rates won’t rise this year, sentiment is bullish. When sentiment turns bearish people will interpret the news in a negative way, for example they will not focus on interest rates anymore but on the economy. The weak economic data will prompt them to sell stocks.
Sentiment is one of the most important indicators, when sentiment is bullish odds favour a rally. There is support above 6300 and once again we saw the FTSE approaching this level last night. Today the index is bouncing back. Why hasn’t the index broken decisively below 6300? Probably because today we have an important announcement from the ECB. At 1.30pm Mario Draghi will speak and there are rumours that he will announce more stimulus measures to boost the economy. When people anticipate good news there are in a state of bullish sentiment which is reflected in the rising BTI (sentiment indicator). The market will struggle to go down in that situation.
Yet we cannot eliminate the bearish scenario shown on the chart below. What about if Mario Draghi disappoints investors today by not announcing more stimulus? The FTSE would go down to complete wave b (circle) of a potential triangle. This triangle will remain valid for as long as the FTSE remains below the top of wave (b) at 6408. It’s taken a long time for wave b (circle) to unfold, the move of the last few days is sideways which is not what you would expect to see in a triangle. For this reason and because sentiment is bullish, we have an alternate wave count:
The sideways move of the last few days resembles a triangle [(a),(b),(c),(d),(e)], this move is a pause in the uptrend which means the next move will be up. This scenario is becoming the top wave count as long as 6300 remains intact, the sideways move is wave b (circle) of an upward zigzag [a,b,c (circle)] that will form wave 4. The next move should be a quick rally to 6480 to complete wave c (circle) of 4. The index cannot rally to 6521 which is the bottom of wave 1 (impulse wave). This rally could coincide with the ECB announcement at 1.30pm, this is why it will be quick. Thereafter I expect the decline to resume with wave 5 down.
The bottom line is that we have two scenarios, wave b (circle) down of a triangle or wave c (circle) up of a zigzag and it’s not clear which one is unfolding. We will know after 1.30pm.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
