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The stock market rally is running out of steam, the FTSE 100 is breaking down and the S&P 500 is at key resistance. The FTSE 100 has been trading sideways for months, today it looked as if it was going to re-test the upper range above 7400. The index was near 7400 until midday when the MPC meeting minutes were released. The news was bad, the FTSE plummeted. In the Bank of England statement, some members suggested UK rates could rise earlier than market participants had anticipated. GBP/USD surged on the news and the FTSE 100 went down. GBP/USD is negatively correlated with the FTSE, when GBP/USD is strong the FTSE is weak.
The FTSE 100 has now greatly underperformed the S&P 500. The S&P is at new all-time highs, the FTSE is 4 percent below its all-time high. I always say the FTSE is the leading index, the fact that it is going down does not bode well for US markets. What is noticeable is the long sideways move since the bottom of wave a (circle) on 11 August. This move is not impulsive but corrective and when a corrective move occurs after an impulse wave down [wave a (circle)] the odds favour another decline. Basically when the corrective move ends the decline will resume with another impulse wave. Therefore, we have an alternate wave count in which the corrective wave is a “b” wave [wave b (circle)] and the larger pattern is a falling wedge as seen on the daily chart:
This falling wedge [1,2,3,4,5] is the first wave of the bear market [wave (1)]. We are now in wave 3 this wave is in three waves [a,b,c (circle)]. When wave b (circle) ends near 7400 (this wave may have ended today when the index rallied to 7390) the decline will resume with wave c (circle), the target is 7200. As you can see on the chart there will be a significant bounce after wave 3, it will be wave 4. The entire falling wedge will end near 7160 in five waves, that will be the bottom of wave (1). It would appear the bear market is truly underway.
Thierry Laduguie is Trading Strategist at www.e-yield.com
