FTSE 100 is Leading The Way

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My sentiment indicator (BTI), has been accurate at forecasting the stock market decline. Sentiment turned bearish at the end of October, the FTSE 100 has been in a downtrend ever since. But sentiment is not a timing indicator, it lags the trend so when the index finds a bottom and turns up, sentiment will still be bearish. We are not far away from a bottom because the 34-day BTI is oversold. The 34-day BTI is a trend reversal indicator, when oversold a multi week rally could start at any time. The indicator is now at -618. The indicator dropped below that level only once in the last five years and that was a major buy signal. So the odds of a rally ahead are high, however, like with any indicator I can’t say if this rally is starting now or if it will start next week.

In general the S&P 500 will also bottom out when the 34-day BTI is oversold. Well, this index has just started its decline, it’s lagging the FTSE. While the FTSE is near the bottom of wave 1 the S&P is no way near its bottom. May be this is the reason why the indicator will remain oversold for a bit longer, until the S&P completes its decline. I have said many times the FTSE 100 leads the way, it’s been going down since early November, now the S&P is catching up. The ideal scenario is both FTSE and S&P complete wave 1 at the same time on oversold 34-day BTI. This should take another week approximately.

 

I have been monitoring gold because it is a good indicator of future stock market performance. The fact that gold is breaking down below key support is proof that the most serious phase of the stock market decline has yet to come. When investors don’t fear a significant stock market decline gold will be weak. However, I believe the decline in gold is nearing an end near 1250. As noted I expect a multi-week rally in stocks probably in the last two weeks of December. This explain why gold is weak. If my analysis is correct on gold, gold will start rally near the end of December when the counter trend rally in stocks ends (wave 2). This will coincide with a powerful decline in the stock market early next year.

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

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