The Pound is Another Variable Used to Forecast the FTSE 100

When the FTSE 100 does not behave as you expect you need to find out why. Then you need to adapt your strategy. I see that many people find it difficult to adapt, for example in January they kept shorting the FTSE 100. According to IG, 80%-85% of traders were short during the massive January rally. Today I can see that many people are bearish again, this time they could be right.

Something has changed. Personally I study two charts to confirm the direction of the FTSE 100, S&P 500 and the pound (GBP/USD). As you have noticed we don’t have one variable but two and the FTSE is increasingly dependent on the pound, so right now you need to forecast GBP/USD.

Based on Elliott wave analysis, GBP/USD has completed five waves up, so the current pullback was expected. That was one reason I said to my members to get ready for a FTSE rally to 7200 yesterday. As I write the FTSE has just touched 7200.

 

The fifth wave in GBP/USD is not a typical wave 5 because wave 4 overlapped wave 1, so I call this wave 4 wave a (circle), this is a subwave inside wave 4. In an impulse wave the fourth wave cannot overlap the first. The new high is wave b (circle) and the current move down is wave c (circle), this move will end near 1.2400. What this chart is telling us is that the pound will rally again in February and the FTSE will decline.

There is another scenario to consider. The rally in the pound could be a double zigzag [a,b,c,x,a,b,c (circle)] as shown on the chart:

 

This scenario has the same implication because the decline is wave b (circle) and the next move is wave c (circle) up.

As I have indicated you need to adapt to current conditions in order to succeed. Whether you trade intraday or short term, you need to look at more than one market / indicator. When the Elliott wave pattern on the FTSE 100 is confirmed by the pattern on the S&P 500 and GBP/USD, the odds of making a profit are high.

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

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