The FTSE broke above the previous high (6612.2) an indication that the fifth wave up is underway. The FTSE was helped by Wall Street recording a new all-time high and receding political uncertainty in the UK. We now have a new PM but there is still work to be done with the EU. Furthermore the market was boosted by expectations that the Bank of England will announce more stimulus on Thursday.
Well, I won’t comment on stimulus because it is like a magic wand, we know it’s a trick but it works. Meanwhile the earnings season is underway and as always we can’t say if earnings will beat estimates but the market tends to rise during the earnings season.
This time however, and because the market has shot up in the last two weeks, the FTSE is already overbought based on the Top 20 Differential and 13-day BTI. When these two indicators are overbought the probability of a decline is high.
As you can see there is lots of positive for the market to continue to rise but at the same time the market has gone up too fast and the FTSE is overbought. In that situation you want to go long but after a decent pullback as it is not recommended to buy an overbought market.
The rally from the post referendum low is wave A in five waves [i,ii,iii,iv,v (circle)] and we are now in the final wave up [wave v (circle)] and the indicators are overbought. This is why it is not the ideal time to go long. The time to go long will be after wave B, sometimes in the next two weeks. Here we have a medium term rally in three waves [A,B,C], the next move after wave B will be wave C up. The target is near 6900.
