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Sentiment is bullish but the 13-day BTI became overbought twice on 26 February and 1 March, the FTSE 100 has yet to pullback. When the 13-day BTI is overbought there is a high probability the FTSE will pullback. This time it will be more than a pullback because the structure of the rally is complete, the downtrend should resume.
I guess investors have been focusing too much on the price of oil and because oil is stable at $34 this is providing some support. The recent rebound in commodity prices has also helped the UK index, higher commodity prices are associated with a rebound in economic activity. As far as China is concerned, we can’t say the economy is improving. The latest Caixin services PMI was again weaker than expected.
My view is that the rebound is commodity prices is technical and not an indication that the economy is doing better. Let’s not forget that commodity prices collapsed in the last few months, as with any other market, when prices are oversold they will bounce back, until the downtrend reasserts itself.
The same thing applies to the stock market, the FTSE became oversold in February and now it’s rebounding. Once the bounce is done the downtrend will resume. Prices move faster than the economic data, they move up in anticipation of better economic numbers. If the numbers disappoint the index will plummet.
At some point investors will start wondering why we are trading 12% higher since 11th February while nothing has changed on the macro front. The upward move appears complete after the rally to 6194 yesterday, you will note that the high occurred at the open, the index was weak the rest of the session. That rally was the fifth wave inside wave c (circle). We have five waves inside wave c (circle) and three waves [a,b,c (circle)] inside wave 2 which is the structure of a completed counter trend rally.
I don’t expect the FTSE to move above 6194 but if it does upside is limited because we have a similar terminal pattern on the S&P 500. We can’t rule out an extension above 6200 because too many indicators are bullish. Sentiment is bullish, the MACD, DMI are bullish and the 13-day moving average is above the 55-day moving average which is also bullish. But in the medium term the index will probably be trading significantly lower.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
