The FTSE 100 opened higher this morning boosted by a strong rally on Wall Street. As I said recently, the S&P 500 is a wild index, it can rally for days or weeks to the point where investors will feel safe then it will sell off. The rally was driven by technology, energy and healthcare stocks. Better than expected manufacturing PMIs in Europe, UK and US also helped stocks rally.
We are now at a critical time, if a decline is going to happen it must happen soon otherwise there is a risk the rally will extend. That's because the Top 20 Differential is oversold (below -2.5%). You will never see an oversold Top 20 Differential at the top of a rally, this condition occurs at the bottom of a decline. Therefore can we say the FTSE is at the bottom of the decline? Well it's not that clear because the decline is not broad based, many blue chips have gone up and the reason why the Top 20 Differential is oversold is because the three most influential sectors, Banks, mining and oil stocks, are all down and dragging the Differential to oversold.
There is a divergence between the FTSE and the S&P, the S&P is hitting new highs but the FTSE is lagging, the UK index is down from the high in October due to weakness in banks, oil and mining stocks. As the FTSE is the leading index, chances are the move down in the FTSE will continue and the S&P will catch up and turn down. But this move must happen soon; The longer the S&P trades near the highs the more confident UK investors will become and they will start buying oversold mining and oil stocks and they will push the FTSE higher. This is why time is important.
The next major decline will be wave 5 and the question right now is: was the recent high at 6488 the top of wave 4? If so the decline will resume. But sentiment is bullish and it's possible wave 4 is not yet complete. There is potential for a rally back to the previous support line at 6501, this support line is drawn from the lows on 9 August 2011 and 16 October 2014. It's been broken and is now resistance.
