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On the Daily chart the pattern since January appears to be an expanded flat [a,b,c (circle)] for wave 2. The reason I mention this pattern is because the FTSE 100 has been trading in a tight range (sideways) since the peak at 6216. Well, if that level marked the end of the rally the FTSE should be trading much lower by now. after wave 2 we have wave 3 down and this wave is more powerful than wave 1, so the fact that the index is still trading near the high is an indication that it will probably make a new high before collapsing into wave 3.
This would create wave c (circle) in five waves, which is the structure of an expanded flat. We are at a critical time when investors are not sure whether to buy or not because the market has risen strongly in a short period of time and they are probably waiting for tonight FOMC statement before making their moves.
We saw a similar situation last week ahead of the ECB announcement. We also remember how the market sold off after the announcement. Well, I think we could see a repeat of the post ECB announcement which was a rally followed by a decline. This time the rally would carry the FTSE to new highs. The worst case scenario will be an immediate decline. I said this because I don’t think the Fed will announce anything that we don’t know. Unlike the ECB statement the FOMC will be cautious in its statement, saying that it is concerned about growth but strong job market and inflationary pressures are the right conditions for another rate hike. So I don’t expect anything bullish in the statement.
Yesterday the FTSE closed down on lower oil price but the proper decline has yet to start. Today the index is firmer. Obviously there is always a risk the FTSE will rally because the pattern is sideways. However if it does upside is limited. A break above the top of wave ii at 6198 would probably change the pattern to a more bullish pattern and in this case the target is near 6230-6250 near the 200-day moving average.
But it’s not clear how far it would go, the strength of the rally, if any, will be dictated by what the FOMC has to say.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
