The FTSE was strong yesterday, the index was boosted by mining stocks. As we know the index is influenced by the three major sectors, oil, banks and mining stocks. When one of these sectors is strong in general the FTSE is strong too. The rally in mining stocks could extend further as bargain hunters will be attracted by low valuations after the recent slide.
Boosting sentiment was the news that private payrolls from the ADP report fell short of the 210,000 gain analysts had expected. The US private sector added 185,000 jobs in July. The soft number raises doubts about the strength of the labour market and will reassure investors that the Fed won’t be in any rush to raise interest rates. If tomorrow’s nonfarm payrolls number is lower than expected the same thing will apply and in this event stocks should rally. In a period of bullish sentiment bad news is seen as good news, people will always find a reason to buy. In a period of bearish sentiment it’s the opposite, people will always find a reason to sell.
Today at midday we have the BoE MPC meeting minutes and interest rate decision. Will the BoE raise interest rates? Such a move would be negative for the FTSE. A more likely scenario is no change in interest rates but the minutes of the meeting could give us some clues as to the timing of a possible interest rate rise. Therefore there is a risk the FTSE will sell off this afternoon. This would provide an opportunity to go long as the next move should be up.
The FTSE is in the midst of wave c (circle) which is the third leg inside wave 2. So far wave 2 has retraced more than 50% of wave 1, the 34-day BTI is rising and pulling away from oversold as you would expect in a multi-week rally. I don’t expect this indicator to become overbought at the end of wave 2 because the move is counter trend, it is well underway and time is running out. A counter trend move is weaker than a move with the trend, I am talking about the long term trend which is down. In the short term the trend is up and wave 2 will be complete after a larger upward retracement, the move should end above the top of wave a (circle) as the pattern is a zigzag. This level is 6813.5. A possible target is in the range 6850-6900.
