FTSE 100: First Wave Down is Complete

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Sentiment as indicated by my sentiment indicator (BTI) turned bearish a week before the FTSE 100 peaked at 7582.9. We have a good example of bearish sentiment at work here. I remember when I was calling for a decline at the start of November, despite the strength of the market and despite the fact that we were entering a positive seasonal period, I got a few messages from people who did not believe the market could go down. Their reasoning was that there was no bad news to kick start a decline.

© Image copyright tjeerd

At the start of November I would say 80% or 90% of people were bullish and they expected a new all-time high. Bad news will certainly help the market go down, but I have seen markets going down for no reason, I mean without any good or bad news. There is a reason why markets go down on no news and that is when sentiment is bearish and the Elliott wave count is complete. My sentiment indicator turned bearish on 30 October and on 7 November the rally was in five waves and the fifth wave was also in five waves, this is what we call a completed Elliott wave. On 7 November I was confident the FTSE would turn down and I posted this chart:

 

According to Elliott wave rules, the fourth wave of an impulse wave never overlap the first, here wave iv (circle) ended above the top of wave i (circle). Wave iii (circle) is in five waves and wave v (circle) is in five waves [(i),(ii),(iii),(iv),(v)]. The structure of wave C is complete in five waves and a turn down below 7600 was expected.

As you can see this powerful form of analysis was correct, the FTSE declined more than 200 pts from the top on 7 November. The decline is wave i (circle) and there are five waves inside it on the 60-min chart. Sentiment is still bearish and the first wave of a long term decline is complete, the next move is wave ii (circle) up. Once again I am confident the FTSE will rally because the two timing indicators, Top 20 Differential and 13-day BTI became oversold at the end of five waves down. When they are oversold the odds of a short term rally are high. While I expect a rally to 7500 for wave ii (circle), it is not clear if this rally will occur this week or next. The reason is there is potential for GBP/USD to move higher which is negative for the FTSE. So we could see a pause in the rally today/tomorrow, the rally would resume on Monday.

Thierry Laduguie is Trading Strategist at www.e-yield.com

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