On Friday the FTSE 100 made a new all-time high at 7447. The Top 20 Differential, a timing indicator, is overbought, an indication the blue chips have gone up too far but the index is still strong. It is not clear why the index is strong this morning, the S&P 500 is pulling back in pre-open, oil is down and the pound has rallied in the last few days. All this is negative for the FTSE.
GBP/USD has moved up from 1.2150 to 1.2400 but the FTSE was still trading near the high on Friday. Perhaps the FTSE will catch up with the S&P today, the UK index is down this morning. Sentiment is bullish and the Top 20 Differential is overbought, this means the trend is up and the index is overbought, in this situation I expect a pullback to relieve the overbought condition followed by a rally to new high because sentiment is positive.
This should happen over a two or three-day period. However, if sentiment turns bearish during the pullback, the decline will last longer. I think sentiment will tell us which way the market is going in the next few days.
Another clue can be found in the European indexes. The German DAX is tracing out a pattern that resembles an expanding triangle. The previous decline was in three waves then prices made new highs. The current decline should be in three waves [(a),(b),(c)] too.
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