Sentiment is bullish but we are near the top of wave 4 of a falling wedge. In fact, it’s possible wave 4 is complete because we are near the upper limit where the wedge upper line will no longer converge with the lower line. If we are in a falling wedge [1,2,3,4,5] the upper and lower lines must converge. At the moment they are converging but a continuing decline in the pound and rally in the S&P would change this pattern.
We have two positive factors, declining GBP/USD and rising S&P, this explains why the FTSE 100 has rallied further than expected. Had GBP/USD not declined sharply, the FTSE would not be near current levels despite the rally in the S&P.
I posted a chart of GBP/USD yesterday, the decline appears to be in five waves. If so, GBP/USD will rally to complete a move in three waves. This rally will pull the FTSE down and if the S&P declines at the same time we could see a sharp decline in the FTSE. There is potential for the UK index to decline to 7300 in the short term.
The fall in GBP/USD has been caused partly by yesterday’s strong ISM manufacturing survey, which increases the odds of a rate hike in the US in December. A strong dollar is associated with strong economic data in the US, when this happens GBP/USD will decline. The S&P has been boosted by increased optimism about Trump’s tax reform. You will recall investors were optimistic when Trump won the election last year and the S&P rallied sharply, but very little of Trump’s policy has been implemented and investors could be disappointed.
