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FTSE 100: Two Possible Scenarios In The Short Term

The rally of the last few days has been driven by hope, hope that president Trump's tax reforms will happen. This in my view is the only positive factor that can drive stocks higher in the short term. Then we have the central bankers meeting at Jackson Hole starting tomorrow, this will influence the market but it’s not clear which way.

Right now we have two possible scenarios on the FTSE 100, either an impulse wave up to 7470 or a descending triangle. In the case of descending triangle the target is lower, near 7410.

The top chart shows a potential descending triangle [(a),(b),(c),(d),(e)] inside wave ii (circle). This is possible because I expect a rally in the pound. If the pound rallies the FTSE will struggle to go up, it is more likely to go down, this move will be wave (d) of the triangle and the target is 7300.

The alternate wave count is on the chart at the bottom, it shows a rally in three waves [(a),(b),(c)]. The current rally is wave (c) inside wave ii (circle). In this scenario wave (b) is not in three waves which is not textbook. Yet it looks like wave (b) ended at 7296.8. It would appear the rally is wave (c) and this rally has further to go, it should end above the top of wave (a). A target is 7470. This scenario will happen if the S&P rallies to new highs. If the S&P rallies to a new high, the FTSE will rally too but not as much because I expect the pound to rally. GBP/USD is still near the bottom of a fifth wave, I expect a rally in GBP/USD, this will slow the FTSE advance.

It’s difficult to know which scenario is playing out but there is a case for selling the FTSE at 7400 with a wide stop loss because the maximum target is near 7470. In any case the rally is nearing an end, the next move is wave iii (circle) down.

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