Both FTSE 100 and S&P 500 have completed five waves down from their respective tops, the next move is a counter trend rally. The FTSE is oversold as indicated by the oversold 13-day BTI and Top 20 differential.
An escalation in the trade war was not expected, Trump has repeatedly said that trade talks were going well. The S&P rallied to new all-time high on trade talk optimism. Now Trump is not happy, he has increased tariffs on some Chinese goods and his administration is looking at imposing more tariffs. Meanwhile China responded with new tariffs on some US goods.
The S&P 500 is already down 5% from the all time high. As expected now Trump is talking up the markets, he does not like when the markets go down. Now he says there is still a good chance for a deal in the next few weeks. Markets are rallying this morning. He is referring to the G20 summit next month where he will meet President Xi.
People have no choice but to follow Trump: he is a master when it comes to pushing the stock market higher. You will recall in December last year when stocks were crashing he told people to buy, he was right. But one day Trump will be wrong and stocks will crash. The Fed will be wrong too. Presidents and central bankers do not always act in a rational manner.
What we know is that sentiment turned bearish at the start of May when the stock market was in a raging bull run with few bears around. My sentiment indicator, the BTI, was correct, it turned bearish on May 2nd. The Elliott wave pattern together with the change in sentiment was a warning the stock market would decline. Stock markets are now oversold, a rally is imminent.