FTSE 100 Forecast, Trading and Analysis

July 31st - Bullish sentiment can change the pattern

 

A sharp fall in GBP/USD pushed the FTSE higher, the breakout occurred to the upside which means the rally is not yet complete. As I have said many times it is impossible to forecast GBP/USD due to Brexit uncertainties. Brexit deal or no deal, that is the question. What is surprising is that the pound did not fall immediately after Boris Johnson became PM. The question is why? We know he is a Brexiteer and he does not mind leaving the EU without a deal. Yet I remember the pound strengthened when he became PM. My assumption was that the bad news was priced in GBP/USD and it was safe to expect the pound to rally. It is clear that the bad news was not priced in. This shows markets do not always respond immediately to an event.

 

Important news can change the wave count. Prior to the weekend, there was a good chance the FTSE was hitting resistance at 7600, the collapse of the pound and the resilience of the S&P 500 have pushed the FTSE above 7600 and the pattern has changed. The pattern is not clear to interpret but rallies are not impulsive, they are in three waves. This is the signature of a counter trend rally and it will end soon. We have still some bullish developments this week, I conclude that the rally wll probably end at the end of the week.

June 28th - Forecast is on track

 

I said the stock market would turn down in July, this forecast remains on track. My trend reversal indicator is approaching overbought a condition that occurs at market tops.
 
The rally has been driven by optimism, when politicians and central banks promise to deliver something good for the markets, markets rise. When they fail to deliver markets fall. In terms of psychology, if markets have already risen because of the promises, there is a high probability the government and the Fed will not fulfill their promises. The S&P 500 has rallied to new all-time high before the promises are fulfilled, there is no reason to please investors anymore.
 
For that reason the stock market will fall, this is confirmed by the Elliott wave. The pattern since the start of 2018 is an expanding triangle [(A),(B),(C),(D),(E)], the decline in December was wave (C), the current rally is wave (D), the decline in the second half of the year will be wave (E).

 

June 19th - More interference from the president of the USA

 

Markets are overbought again but it is not clear if they will pullback today. We have the FOMC statement and US interest rate decision tonight, and given that investors hope for some good news there is little chance of a pullback today. Investors are addicted to stimulus, any mention of a rate cut or QE and they buy. We saw this happening yesterday when the ECB hinted at a rate cut, markets surged after Draghi’s comments. The central banks are running out of ammunitions, their rates cuts will have no impact on the economy, cutting rates won’t save the economy. But investors don’t care, they trust the central banks. They trust the banks because last time they did QE they engineered a bull market.

 

There will be time when investors will recognize that QE is the problem, there will be a time when any mention of QE will have the opposite effect on the stock market. QE can push asset prices higher but it weakens the economy in the long run, it makes the rich richer and the poor poorer, it creates anger among the working class, it fuels the rise of populism, socialism and social unrest. And Trump is supporting QE, which does not make sense. He keeps tweeting that the Fed should cut rates and do QE, this is why markets surged yesterday, investors believe Trump is influencing the Fed and the Fed will do what he wants. What Trump says does not make sense because if the US economy is doing great as he keeps repeating, the economy does not need stimulus. QE is only needed when an economy is in recession or going into recession. Trump came to power to help the working class with his make America great again slogan, I wonder if the people who voted for him realise that QE and the trade war will make their life more difficult.

 

As the US economy is not yet going into recession, we see some bad numbers and some good numbers, I believe that the Fed won’t cut rates today. The Fed has limited ammunitions, therefore it needs to keep them for later, when the economy will really slow. Same thing with QE, it is too early to launch QE. So all those who bought stocks in the last two weeks, because they believed a rate cut was coming, could be disappointed tonight. If the Fed does not cut rates and is not dovish enough, we will see a sell off. That is what the Elliott wave suggests on the S&P 500, we have not seen a proper pullback for the second wave, this pullback is coming.

June 6th - Sentiment is changing again

 

Sentiment is changing from bearish to bullish as indicated by my sentiment indicator, there is a high probability the trend in FTSE 100, S&P 500 has turned up. An early bottom came after the Fed hinted that rates may go down.
 
There is always a time when the Fed or Trump will intervene to boost the markets, this tends to happen after a large market decline. We had a large decline in May and now Fed chairman Powell is becoming dovish.  
 
That was the trigger for the rally in the US. People are still relying on the Fed, they still rush to buy as soon as they hear a bit of good news. Then yesterday came the ADP employment report, the report was awful, the risk of a recession has now increased significantly. But investors are still buying. Investors should focus on the recession, not the rate cuts. The Fed will rally the markets and the S&P could make a new high. But the economy will not get better and in a few months a new leg down will start. As I said the long term pattern is sideways. 
 
Private payrolls increased 27K in May, that was the smallest payroll increase since March 2010.
The question is, why did people buy this bearish news? The obvious answer is because interest rates will go down. But do lower interest rates have an effect on the economy? The answer is yes and no, actually it depends on the size of the cuts. If the Fed cuts rates by 1% or 2% this won't help the economy because it is too small to stimulate the economy. Only larger cuts like 3% or more will stimulate the economy. The problem is the Fed funds rate is currently at 2.25%, it is too small to stimulate the economy. Do you really think cutting rates to 0% from current level will make the US economy great again? The answer is no. I think when the Fed becomes dovish it has a psychological short term effect on investors, that is all.
 

The psychology is changing and this is reflected in my indicator, markets should rally. Any pullback will present an opportunity to buy.

 

May 21st - US escalates the trade war because the stock market has rallied considerably since December

 

Stock markets declined yesterday after the US said US tech companies will not be allowed to supply Huawei with components and applications. Huawei relies on US companies to manufacture its hardware, if applications like Youtube and Google maps are not available on Huawei phones the company will lose business. That is precisely what the US is trying to do, to weaken Huawei increasing dominance.

 

This will not help the trade talks between the US and China, so stock markets declined. The risk of another leg down in the stock market is high, but today markets are rallying after Washington temporarily eased some restrictions imposed on Huawei. Once again investors rush to buy on any piece of good news, why would you buy when the trade war is intensifying?

 

The answer is probably because people now understand Trump, he will start something that is bad news for the stock market, at the same time he hopes the stock market won’t go down. If the stock market goes down, he will change his mind and markets will rally. So the news that some restrictions have been lifted “temporarily” is enough to convince people that he is changing his mind. Of course this is not true, this action is temporary, nothing has changed. I believe that Trump will only back down after a large stock market decline. I think the decline from the top is not large enough that is why the US is re-starting the trade war. Plus we have the potential for retaliation from China, this will probably happen and the stock market will go down. Sentiment is bearish near the top, this suggests a larger decline is required before the bull market resumes.

May 2nd - In mid April I warned that the FTSE 100 was approaching a resistance area and the trend would turn down. You will recall the chart I sent you with a yellow rectangle above 7500. That area was where I expected the trend reversal indicator (34-day BTI) to give a sell signal. Once again this indicator was spot on, the indicator gave a sell signal and the FTSE peaked on 23 April. The index has been declining for nine days. See my report posted on 18 April:
 
 
The 34-day BTI is a reliable indicator, when overbought we can expect a multi-week decline. It does not matter what people you chat to think, if they are bullish don't be disracted. Let's face it, people ar always bullish at the top. I bet you most people thought the FTSE would go to 7600, 7700 or higher. The truth is, this indicator has a good track record and you must follow it.
 
The indicator is published in the FTSE short term forecast, to subscribe click:

 
http://www.e-yield.com/payment-stf-with-discount/

March 21st - We saw a dovish Fed statement yesterday but the S&P 500 closed down. That was a surprise, I guess investors expected a dovish statement, they bought the rumour and sold the fact. It could also be the first indication the mood is changing from bullish to bearish. After a 20% rally in less than three months, the mood will have reached extreme optimism and this was confirmed by the 34-day BTI rising above 400, this is often followed by a change of mood.

 

One reason markets are pulling back today is fear that the Fed is making a mistake. Being dovish is good for the markets because not raising interest rates will help the economy, but at the same time the Fed signalled it will end quantitative tightening in September, this means it will stop decreasing the size of its balance sheet and stop normalisation, which means the Fed fears the economy will deteriorate further.

 

If the economy deteriorates the fear is that the Fed will launch QE again which many believe was a mistake following the last financial crisis. The FTSE has rallied considerably since December, on the weekly chart below we have a near 61.8% retracement. From the all-time high at 7903 the FTSE declined to 6536 to complete wave (1) of a five-wave decline. The rally that followed is wave (2) and the 61.8% retracement is at 7380. A push above that level is possible as wave (2) does not appear to be complete. Wave (2) is a triple zigzag [W,X,Y,X,Z], we are now in wave Z in three waves [a,b,c (circle)]. Wave a (circle) ended at 7350, the current pullback is wave b (circle) expected to end near 7200. After the pullback the FTSE should rally above 7400 to complete wave Z and (2). This will be textbook because second waves are large, they tend to retrace more than 61.8% of the first wave. 

August 31st - how to use the trade signals from the FTSE intraday and FTSE short term forecast services

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