We continue to see a market rising on hope while the global economy deteriorates. The UK won't be immune to the global slowdown, but what's moving the FTSE are global companies in the banking, oil, pharmaceutical and mining sectors. Crude oil is bouncing back, naturally oils stocks are bouncing back. In addition BP Plc (LONDON:BP) and BG Group (LONDON:BG) reported better than expected results, and mining stocks were strong, this gave a boost to the FTSE.
Mining stocks were oversold so it is normal to see them bounce. Never short a stock that has gone down, always short it when it is still going up.
The index is now near the key resistance of 6905, but it has yet to break above that level. Now I expect crude oil to resume its downtrend, the dead cat bounce is done, this means oil stocks will drag the FTSE lower. Not sure about mining stocks, latest news from China will not help mining stocks. The Chinese HSBC services PMI came in lower than expected.
In Europe Italian Consumer price index dropped more than expected and is now negative (-0.4%) and in the US factory orders plunged -3.4%. The only good news comes from Greece where the newly elected finance minister said Greece was willing to accept some form of debt restructuring.
The FTSE broke above the first key resistance level at 6865, this level was the top of the previous rally. The second key resistance level at 6905 remains intact. The break above 6865 means the rally from the low in December is no longer in three waves but in five waves.
The expanding pattern going down to 6732 was a fourth wave, the current rally is a fifth wave. The risk of a pull back has increased because the index is overbought after five waves up.