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Sometimes I get emails from people asking me if I am sure we are in a bear market. No one can be sure because a forecast is based on probabilities. If the probability of a bear market is 80%, there is 20% chance the FTSE 100 is in a bull market. If the FTSE rises it’s doing the low probability scenario.
The important thing is to go with the high probability scenario. If you trade in the direction of the high probability scenario you will have more winners than losers over time. The question now is, are we in the second wave of a bear market or the first wave of a bull market?
If I assume that the rally is the second wave of a bear market, the current rally which is near the all time high is normal. Very often the second wave up in the early stages of a bear market will retrace a large portion of the first wave. This happened in 2007:
In 2007 wave 2 retraced 100% of wave 1 (without making a new high) then the FTSE collapsed. Today the FTSE has retraced nearly 100% of its wave 1. The next move will be a sharp decline for wave 3.
Now, if we assume that we are in a bull market, the rally is wave 1:
In this alternate scenario, the low in March was the bottom of a fourth wave, the current rally is either the fifth wave or wave 1 inside the fifth wave. If it is wave 1, it is ending and the next move is wave 2 down to the 7200-7300 area.
Why is the rally ending? Because my trend reversal indicator (34-day BTI) is overbought above 400, see:
The 34-day BTI is the red bar chart, when this indicators moves above 400, the FTSE will turn down to start a multi-week or multi-month decline. Right now the 34-day BTI is at 542.
It does not matter if we are in a bull or bear market, either way the FTSE 100 will decline.
Thierry Laduguie is Trading Strategist at www.e-yield.com
