When the FTSE declined below 7200 last week, I was expecting a rally. This has been the textbook pattern in recent years, large declines are bought. Based on the pattern which is a falling wedge, it is still possible the FTSE will decline to 7150 before rallying but odds of this decline happening are diminishing.
With the S&P in an uptrend and sentiment bullish, I can’t imagine the FTSE at 7150 unless we get a massive rally in the pound. This is possible because the pattern in GBP/USD since the top at 1.3619 is a triangle. A triangle in an uptrend is bullish, this is probably a fourth wave in which case the next move is the fifth wave up and the target is 1.3700.
Such a rally accompanied by the small pull back in the S&P could push the FTSE to 7150. Tonight we will have more clarity on the GBP/USD pattern when the FOMC statement is released at 7pm. If the FOMC statement depresses the dollar, the pound will rally and this will confirm the pattern (fifth wave up). The Fed will probably give more details on its plan to reduce the size of its balance sheet, and will leave rates unchanged. If the Fed thinks inflation will remain low due to recent economic numbers and the impact of hurricane Irma on the economy, the dollar will soften and GBP/USD will rally.
This rally will depress the FTSE, however I believe any further decline in the FTSE at this stage should be bought. I expect a bounce to 7450-7550 in the next few weeks, so any decline to 7150 will present a buy opportunity.
