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Sentiment has turned bullish and we have two possible scenarios on the FTSE 100. Either the rally is wave C of a triangle inside wave (4) or it is wave C of a zigzag inside wave (4). The difference between the two wave counts is in the target. If it is a triangle the target is near 6400, if it is a zigzag the target is near 6750.
Since the vaccine announcement the FTSE 100 has outperformed the S&P 500, this has been caused by a rotation. Investors have been selling overbought sectors like tech stocks and they have been buying undervalued sectors like oil, retail, banks, airlines, leisure…these sectors are plentiful in the FTSE index. You can see the S&P 500 has been declining since Monday but the FTSE has been rallying. Therefore downside in the FTSE is limited.
Yet when I look at the tech stocks they are all in a consolidation pattern, they have declined but their pattern is a pullback in the uptrend which means they will rally again and the S&P will outperform the FTSE going forward. The problem with the FTSE now is that it has risen too far too fast, it is up 13% since 30 October without any pullback. It is rare for the FTSE to rally 13% without a pullback, for that reason the odds of a pullback are increasing.
I can’t say when this pullback will come, but based on statistics of past patterns one is due. The question is, have fund managers finished adjusting their portfolios? It is difficult to tell, fund managers are not traders, they are slow to place their bets. I would say the majority acted on Monday after the news, some acted on Tuesday and some will probably act today. And if the FTSE declines they will buy more so the FTSE will be supported, this is why I think downside is limited. We would need some kind of sharp selloff in the US to bring the FTSE down.
On the top chart I assume that the rally is wave C of a triangle [A,B,C,D,E], this move will be in three waves [a,b,c (circle)] and we are near the end of wave a (circle). The next move is wave b (circle) down, the target is 6100. After this decline the FTSE will rally to 6400 to complete wave C. If however, wave (4) is a zigzag [A,B,C] we have the following alternate wave count:
If wave (4) is an upward zigzag [A,B,C], wave C will be in five waves [i,ii,iii,iv,v (circle)] and the rally is wave i (circle). The next move is wave ii (circle) down. Thereafter the rally should resume, the target 6750.
Thierry Laduguie is Trading Strategist at www.e-yield.com
