The rally has been too strong, sentiment is changing from bearish to bullish. But the 34-day BTI is still declining and not confirming the BTI. In this situation we assume that sentiment is neutral. Sentiment will turn bullish when the 34-day BTI turns up.
Today the FTSE is boosted by some economic data coming from China. Chinese GDP was in line with expectations but industrial production was strong. This should boost mining stocks too. The danger comes from the Chinese stock market which has encountered a mini crash in the last month. Prices bounced back early this week and today the Shanghai composite is down 2.4%. Is this the resumption of the decline?
In Greece tonight parliament will vote to pass the bailout deal, although the market has rallied on a positive outcome, if parliament rejects the bailout deal the stock market will collapse tomorrow. We are not going long until we see the result.
Today the FTSE will extend its rally, the move from the recent low is large for a fourth wave. The FTSE has already retraced 50% of wave 3, the rally is an impulse wave. This suggests that this move is not wave 4 but wave a (circle) inside wave 4 where wave 4 is a triangle [a,b,c,d,e (circle)]. In this case the next move will be wave b (circle) down.
There is resistance at current levels because the index is above the 200-day moving average (assuming the trend is down). Now, if the trend is up this moving average will not be a strong resistance. It’s possible the trend has turned up because the BTI is up. Remember this is a directional indicator, when the BTI is rising chances are the trend is up. Because of this we must consider an alternate wave count as shown on the chart below.
This is a daily chart showing the entire decline from the top in April. The decline to 6430 could be the first wave [wave 1] of a long term decline. Very often the first leg of a long term decline will take the shape of a wedge pattern (two converging trendlines) in which the fourth wave overlaps the bottom of the first wave.
Here we can see that wave iv (circle) overlapped wave i (circle). In this scenario wave 1 is complete after unfolding in five waves and the current rally is wave a (circle) of 2. Wave 2 will be a zigzag [a,b,c (circle)] ending above 6900. This scenario is possible because the BTI has turned up and the 34-day BTI is below -400. I have been saying that when the 34-day BTI is below -400 the FTSE will start a multi-week rally. We could be in that rally right now.
If you are short there will be an opportunity to exit at a profit as the next move should be wave b (circle) down and the target is near 6570. Thereafter the FTSE should rally above 6900 to complete wave 2
