Markets are rebounding from oversold. The FTSE 100 is oversold, shares in the largest companies by market capitalisation have gone down too much, they are oversold and ready to rebound. The blue chips as they are known don’t stay oversold for long, investors will buy them and this will push the FTSE higher.
This does not mean the trend is up, the trend is defined by the Elliott wave pattern and sentiment. Right now they don’t confirm each other, sentiment is bearish which means the trend is down but the Elliott wave pattern is an impulse wave up. As sentiment lags the market it is possible sentiment will turn bullish to confirm the Elliott wave.
The enthusiasm for stocks we saw in April is gone, the trade war is back on and as it happened last year stock markets are falling. What we are seeing is a fragile global economy that is decelerating, it has been decelerating for years before Trump came to power, before the trade war started. What the trade war has done is expose this deceleration, and to a certain extent it is accelerating this deceleration process.
We saw yesterday global weakness in manufacturing activity, many PMIs in Europe and UK are now contracting. US bond yields are at eight month low, an indication the risk of recession has increased substantially. This caused the dollar to fall in the last two sessions, and GBP/USD has become stronger.
Not easy to tell if the next move in the dollar is up or down. Rising risk of recession and falling bond yields are bearish for the dollar, but the trade war will push inflation up which is bullish for the dollar. We are going in the direction of slower growth and rising inflation, which is not a good combination for the stock market. Therefore I sometimes wonder if the S&P 500 will rally to new highs.
If Trump wants the stock market to rally, more rate cuts are required. The FTSE is the most reliable market, the decline from the top of wave a (circle) is not an impulse wave (overlapping waves). This suggests it is wave b (circle) of an expanded flat [a,b,c (circle)]. Based on this interpretation of the Elliott wave the next move is a rally for wave c (circle).
