I have warned many times that when sentiment is bullish the FTSE tends to rally. We saw a strong rally Friday but this time the rally was more to do with the results of the general election. The worst scenario for the market was a hung parliament, so investors were relieved when it became clear that the Conservative party had the majority of seats.
Then Friday’s afternoon we saw a good US job report, the number was in line with expectations so overall there was no bearish news and stock markets rallied. But we are in the final stages of the bull market or even at the start of a bear market, the 34-day BTI is above 400 and the next major move will be down. When a market is near a major turning point and we see good news we can go short with no fear.
Friday’s rally in both FTSE and S&P has created some uncertainty with regard to the patterns. The pattern in the FTSE is not textbook and for this reason I cannot be very confident in my forecast. The low at 6810 is either the bottom of wave I (circle) or the bottom of a fourth wave. In theory, the first wave of an impulse wave is an impulse wave.
However, I have seen first waves taking different shapes like leading diagonals or expanding diagonals. An expanding pattern is rare, if the decline to 6810 is a first wave [wave i (circle)] taking the shape of an expanding diagonal [(i),(ii),(iii),(iv),(v)], the current rally is wave ii (circle) and this rally will end below the previous high [7122.5].
In the case where the low at 6810 was the bottom of a fourth wave the index will rally to new highs but upside is limited because the 34-day BTI is above 400. If the index breaks above 7122.5 the next target for a top is 7150.
