Yesterday my sentiment indicator turned bearish. I know the FTSE 100 is in bullish mood this morning but this was expected. Don’t forget that the FTSE was up 10% in 11 days at the recent high. Such a move has stimulated the bulls, they think the bull market has resumed. Well they will be disappointed, the move up currently underway is a dead cat bounce.
When my sentiment indicator is bearish the odds favour a decline. In the current set up the Elliott wave pattern is still bullish short term. This is not ideal because sentiment has turned bearish at a time when the wave count points to a rally. We have a conflict between sentiment and the wave count which means my forecast for higher prices in the short term is not high confidence.
Last night we saw a powerful rally on Wall Street as bargain hunters moved in. Today however we have fresh worries about the health of the Chinese stock market. The Shanghai Composite index is down 6%, as someone said, made in China is turning to broke in China. I have said many times that the slide in Chinese stocks is far from over and it will bring our stock market down. Is this the resumption of the decline? In economic news US new home sales tumbled and the services sector was weaker than expected, it is looking increasingly likely that a recession is taking roots in the US.
The bigger picture is that of a bear market in five waves [(1),(2),(3),(4),(5)]. Wave (2) ended at 6488. The decline to 5500 is wave 1 inside wave (3). Basically we are in the midst of a long decline which is wave (3) this move will also be in five waves [1,2,3,4,5] and it is expected to end near 4000. The index has been following a declining trend channel during November-February, the low at 5500 is the bottom of wave 1. The move above the upper trendline on February 17th is an indication that wave 2 up is underway. This move should be in three waves [a,b,c (circle)]. If we assume that yesterday’s low was the bottom of wave b (circle) the next move is wave c (circle) up. A potential target is the 200-day moving average at 6331. This is a natural resistance area. If sentiment remains bearish during the rally we could have an early reversal. If this happens the next move down will be violent because it’s a third of a third, the most powerful wave in a sequence.
