Stock markets are still struggling to rally. Yesterday we saw a sharp reversal after 4pm, the FTSE 100 had been trading higher for most the day but closed down. There is fear in the air, fear that the Fed decision to raise rate will backfire. Naturally, we can't blame investors for not pushing the market higher.
Yet history and the wave count suggest that the FTSE has the potential to rally. The good news is that the key supports of 1993.5 in the S&P 500 and 5872 in the FTSE remain intact. Today in pre-open the rally has resumed, this rally should continue today.
The other good news is that commodity prices appear to stabilise. Mining stocks are bouncing back and crude oil is finding some support above 34. There is no doubt that commodity prices will bounce back, I am not talking about a new bull market here but a decent counter trend bounce would help the FTSE rally to 6200-6300. Why? Because investors always look for bargains and at some point in the near future there is always a chance China will announce more stimulus to meet its growth targets.
So here we are again, the FTSE is attempting to break above 6100 this morning. Even when the FTSE is above 6100 there is no guarantee it will reach 6300. The FTSE is so weak that I may revise the target after Christmas. Weakness can be seen on the daily chart where the last time the FTSE was above the 200-day moving average was on 6 August. When the index fails to cross above the 200-day moving average after four months below it, things are really bad. This situation is unlikely to happen in a bull market, in a bull market the index does not stay very long below the 200-day moving average.
What we are seeing now is bear market action, the index is on the cusp of a significant decline. But the pattern is not complete, the rally from the low on 14 December is an impulse wave and a counter trend rally is made up of two impulse waves. Therefore there must be another impulse wave up to come to complete the counter trend rally which is wave ii (circle). The next major decline will start from higher levels.
