The rally in the FTSE 100 extended on Friday after China surprised the market by cutting interest rates. November was the month of surprises, with the ECB, Japan and China all announcing measures to boost growth. As I said before major announcements have a temporary effect on the market, the market rallies on the day of the announcement and the next day, in general the positive effect lasts a few days.
The thing is, this year we had so many positive announcements in November that the rally has extended and is now overbought based on the 13-day BTI. This indicator rose above 400 on Friday.
This is the second time the indicator gives a sell signal during the rally. When this happens the odds of a decline are greater than after the first signal. So, despite the positive seasonal influence, it looks like December will be a negative month for stocks. Unless we get a short term decline followed by another rally in the last two weeks of December. This is a possible scenario because the market tends to rise during the festive period, and it is always more difficult to make money going short during this period.
The FTSE rallied strongly after the rate cut announcement and the pattern extended. It is still not clear what the pattern is but the rally is nearing an end because the 13-day BTI became overbought for the second time and the rally has retraced nearly 100% of the previous decline which is a near maximum retracement. But we are in a positive period and this week it's Thanksgiving. Once again the market tends to rise during Thanksgiving.