The stock market finally bounced strongly on Friday on positive economic data and today the rally is extending in pre-open. When the market is oversold, any positive news will boost the market and sometime the bounce can be significant. Today we have a series of positive developments.
On the Ebola front no one else has been infected since Friday and the Spanish nurse has now tested negative. This is an encouraging development that will reassure investors. The economic reports, Michigan consumer sentiment and US housing starts came in stronger than expected and investors will be relieved, so money is flowing into the stock market.
Despite the improving data investors know that global growth is faltering, in particular in China and Europe and they hope that the Fed will extend its bond buying program which is another positive development for the market. But risks remain, the main one is faltering global growth. After all, if the economy is still weak after six years of central banks interventions we should be worried.
Another warning that we may be entering a long period of declining prices came when the FTSE 100 completed a long term ending diagonal on the daily chart in early October. The pattern itself is terminal which means it signals the end of a long term advance. Furthermore the end of an ending diagonal is followed by an impulse wave down [in five waves].
The move down from the top is the impulse wave in five waves [i,ii,iii,iv,v (circle)]. If we assume that we have an extension inside wave iii (circle), the current rally is wave iv (circle) so risks remain because the next move will be wave v (circle) down.