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After yesterday’s sell off, the FTSE 100 is now in the midst of a crash. I use the word crash when the indicators are oversold but the FTSE continues to fall. These indicators have been developed for normal markets, but here we are not in a normal market. When the 13-day BTI and Top 20 Differential are oversold the index will rally but in a crash situation they don’t work, in fact nothing work. In a crash what is oversold becomes more oversold, when panic selling sets in no indicator can predict where the decline will end.
We can have a good idea where it will end based on the Elliott wave pattern but in a crash the waves will extend, what looks like a fifth wave is in fact a third wave. Note on the chart the various subdivisions, wave (3) should be in five waves [1,2…], wave 3 should be in five [i,ii (circle)…], wave iii (circle) should be in five [(i),(ii)…]. Basically it is difficult to count the waves in a crash. The other characteristic of a crash is that it happens fast, a crash can occur in a matter of days or weeks then the market returns to normal. Can we say that the decline of the last few week is a crash and the crash is over? Possibly. But I call this move a mini crash, the real crash is for later.
What is more likely is that we are in a bear market and this bear market is far from over. My guess is that we will see some sharp counter trend rallies along the way and these rallies won’t go far, the market will continue to make new lows in the months ahead.
One of these counter trend rallies may have started last night. We saw a sharp reversal in the US, and this morning the market seems to be holding. Chinese stocks are stable. More importantly the bargain hunters will move in and we can’t rule out an announcement from the Fed or some kind of fresh stimulus from China to boost the market. It is a well known fact that when the market is in trouble central banks will intervene.
As a result we can expect a rally in the short term but don’t be fooled by the central banks. In the medium term /long term stocks will make new lows. The decline will intensify, this bear market is far from over, I expect to see 5300 next month.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
