FTSE 100 Forecast, Trading and Analysis

November 20th - The FTSE 100 is not rallying but sentiment is still bullish. My sentiment indicator (BTI) is still rising. Normally sentiment should be bearish, if the trend is down sentiment should be bearish. Maybe sentiment will change in the next few days. But as long as the BTI rises there is a risk the FTSE will rally, especially now that we are in a positive seasonal period.


There is also the pound to consider, this week the pound could cause the FTSE to rally if the risk of a no Brexit deal rises. I recommend to reduce your trade size this week because if the pound moves sharply up or down the FTSE will suddenly become unpredictable.


The risk of a sharp decline in GBP/USD is real, if Theresa May is forced to resign I think GBP/USD will drop sharply. A group of MPs have launched a leadership challenge, if they succeed Theresa May will step down.


I have been saying that investors will start pricing in less aggressive rate hikes in the US and the dollar rally will stop. Last week the warning became louder when the Fed admitted they are concerned about global growth. This prompted a sell off in the dollar, investors now suspect the interest rate tightening cycle may not have much further to run.


We could well see an end to rising interest rates, higher rates hurt the economy as the cost of servicing consumer and corporate debt rises. It reduces disposable income and when prices rise at the same time, consumer can’t spend as much as they would like. This is bearish for the dollar.


If the dollar is going down as I suspect this will be bullish for GBP/USD and bearish for the FTSE (assuming Brexit goes well).
The FTSE appears to be near the end of a third wave, while there is downside potential in the short term, this third wave is expected to end near 6750. This target is realistic because if the S&P 500 declines into a third wave and GBP/USD rebound because of the dollar weakness, the FTSE could reach 6750 before the end of the month. This means we could still have a Santa Claus rally in December, the FTSE next move will be a fourth wave up.

November 13th - The S&P 500 turned down and the FTSE 100 failed to break above the previous high at 7196.5. But the FTSE rallied near that level at the open, yesterday’s high was 7186.5, had the S&P not been so bearish the FTSE would have broken above 7186.5.

 

We are now entering a bullish seasonal period, the period from mid November to the end of December is bullish for stock. The traditional Santa Claus rally is expected, but this tends to happen in bull markets. This year we are in a bear market, there is a good chance we won’t see a Sant Claus rally.

 

Where the index is likely to rally is during the Christmas period when traders are away and volumes are thin, a FTSE rally is nearly guaranteed. This bullish seasonal period together with the rally near the high at the open prompted me to issue an alternate wave count.

 

There is a scenario where wave 3 ended at the low in October, this means the rally in five waves [(i),(ii),(iii),(iv),(v)] is wave a (circle). In this scenario the rally is not finished, the rally is wave 4 in three waves [a,b,c (circle)] and wave b (circle) will be sideways (triangle). We could have a triangle [(a),(b),(c),(d),(e)] inside wave b (circle) in which case the FTSE will rally to 7180 then it will decline to 7070 to complete wave b (circle). The next move is wave c (circle) up and the target is 7300. This scenario is supported by the bullish seasonal period and in this case we would have a Santa Claus rally.

 

But this scenario is not high probability because I expect GBP/USD to rally (bearish for FTSE) and the S&P to decline. It is one scenario to consider in case GBP/USD drops sharply, the other one is bearish. Chances are GBP/USD will rally, rumours of a Brexit deal this is why the pound is strong today and this is bearish for the FTSE

November 7th - The rally in the S&P 500 extended this morning while the FTSE 100 has already turned down, once again we see this relationship in which the FTSE seems to be leading the way.

 

The rally in the US has been driven by the election, and today we learn that the Democrats won control of the House of Representatives. That was the expected results, and I am surprised to see the market going up because this is not what investors would buy. This scenario creates uncertainty for the Trump administration. Gridlock in Washington could cancel some of Trump's projects like the new tax cuts he was planning to introduce.

 

Nevertheless the S&P action is in pre-open, the real action in the S&P will start at 2.30pm and the index, like the Jow Jones, is approaching important resistance. Very often people get exited by an event and when the market opens the bullish mood disappears. Here we have an imporatnt resistance area near 25900 in the Dow Jones which is near the 61.8% Fibonacci retracement of wave 1 and the top of the fourth wave inside wave 1. There is a good chance this rally will run out of steam when markets open in the US.

October 30th - The FTSE 100 is trying to rally but the S&P 500 is going down and stopping the FTSE advance. Panic selling is not far away, this is when markets crash.

 

The risk of a crash is high, you need to be very careful if you go long. A crash is possible because the S&P is erratic and yesterday we saw a complete reversal. This reversal occurred after the S&P was up nearly 2% at the open. It is rare to see this kind of reversal because when the index is oversold at the end of five waves, the ensuing rally is powerful and in general the index will not make a new low.

 

Well, it made a new low, there was panic on Wall Street yesterday. The sell off was prompted by renewed escalation in US – China trade tensions. You would think Trump would calm down just for the sake of the stock market.

 

It is difficult to be positioned for a crash, in general a crash start from oversold levels and because the market is oversold most people are long. In a normal market you buy the dips or you buy when it is oversold, the problem is when the market crashes what is oversold becomes more oversold, the indicators are not reliable anymore. The 34-day BTI is oversold but in the current environment it is not a guarantee the FTSE will rally. In this market you want to short the rallies. The bigger the rally the better.  

 

Right now and if Wall Street bounces back, the FTSE should reach above 7100, if it does it will be a sell. You can also short now if you don’t mind a 100-200 pts rally before it drops. I believe the recent low at 6851.5 was not the final low, I expect a bounce followed by a drop to new lows.

October 10th - The FTSE is rebounding but the decline does not appear to be complete. The index made a new low below the bottom of wave 3 but the lower line of the falling wedge is near 7110, in general the pattern will end when the price declines to the lower line. The S&P 500 is struggling to rally, this index has been in bull mode for ten years yet it is showing sign of exhaustion.

 

The US index is going up alone, the FTSE , European, Chinese and emerging markets indexes are going down. The world economy is more powerful than the US economy so I suspect the FTSE and the other indexes are leading the way. I said the S&P will struggle to move higher because we have too many negative developments.

 

Bond yields are rising, this is negative for the stock market. Various reasons why bond yields are rising, inflation, budget deficit…

 

Lower growth: I think people don’t believe in the Fed projections, when Powell says the economy is “extraordinary” it’s a joke. I would not use this term when major sector of the economy like auto and housing are depressed. The economy is not extraordinary, the economy is supported by the massive amount of debt in the system and the tax cuts. Without debt the economy would be in recession. And the tax cuts means less income for the government and more debt to finance the budget deficit.

 

Rising risk of recession: because interest rates are going up, like in 2007, rising rates pricked the debt bubble. The debt bubble is bigger today, mortgage rates in the US are at 5% and rising, if you add the increase in the cost of living due to inflation consumers will be under stress. This is why Trump criticised the Fed decision to raise rates.

 

Oil at multi-year highs: of course this is linked to rising inflation, and it is a big problem for the emerging markets. Rising dollar and oil price are a negative combination for emerging markets, so we can expect more problems in emerging markets.

 

This is why upside is limited in the stock market. It is difficult to find a new story, one that will keep the S&P going up for many months. Instead the odds favour a decline or a sideways market. The oncoming earnings season is the only positive news I can see, that is if earnings come in as expected or better than expected. Perhaps the fifth wave up in the S&P will coincide with earnings season.

September 20th - The FTSE 100 moved above its trading range and above the 55-period moving average on the 90-min chart. In a downtrend a move above the 55-period moving average is bearish (assuming the decline is not yet in five waves). At the end of five waves down it’s different, the 55-period moving average won’t be resistance.

 

Today Rio Tinto issues details of its $3.2 billion share buyback, another bluechip tries to improve its share price. You have probably noticed an increase in share buybacks in recent months, this happen when CEOs think there is little growth prospects. If company earnings do not grow the share price won’t go up. To make the share price go up companies buyback their shares, this operation reduces the number of shares traded and boosts earnings per share which in turn reduces the price / earnings ratio. The bottom line is shares become cheaper and the share price goes up to fair valuation.

 

If too many companies buy their own shares the stock market goes up. An increase in share buybacks confirms my view that earnings have peaked, we are at the end of the cycle. The trade war won’t help earnings, higher interest rates won’t help, rising inflation won’t help, emerging market troubles won’t help…Inflation is starting to rise strongly, yesterday’s UK CPI was much higher than anticipated. Inflation rose to an annual rate of 2.7% the highest in the last six months. In the US inflation rose to 2.9% in July, and 2.7% in August. High inflation means companies input costs are higher and margins are lower unless they put their prices up. In this environment it is hard to raise prices, rising prices would push inflation much higher.

 

This explains why upside in the stock market is limited, the FTSE will not return to 7900, the S&P may push higher in the short term but the long term is negative. The S&P will drop sharply when people lose faith in Trump. At the moment I believe people are still buying because they believe Trump will make America great again. If Trump fails the stock market will go down. That is what the Elliott wave model predicts, Trump will fail.

 

The President wants a low dollar and low oil prices, which is not compatible. When the dollar falls oil producing countries will hike the oil price otherwise their revenues would fall. And we know what happened to Venezuela, precisely a fall in oil revenues prompted a collapse in the economy. The result was a currency devaluation and now hyperinflation.

 

The president does not want inflation but the new tariffs will push inflation up. Faced with margin pressures, US companies are more likely to adjust their prices to foreign imports so that earnings don't suffer, This means prices will go up.

 

The high oil price will push inflation up, this is well known fact. And perhaps the irony is that the tax reform will push inflation up too. Trump is hoping that companies will repatriate $4 trillion profits stockpiled overseas. So far about $500 billion have been repatriated, this money will increase the money supply. Too much money is bad for currencies and good for gold. You can imagine one of the reasons inflation is rising is the massive expansion in the money supply in the last twenty years. Add another $4 trillion and inflation will probably accelerate. A rise in the inflation rate is expected, this is why bond yields are rising to compensate bond holders.

 

Now if China starts dumping US treasury bonds (they have started to reduce their holding) the dollar will continue to decline, yields and inflation will rise. Trump has a big problem.

September 5th - I have been saying in my daily reports that the FTSE 100 leads the way. This means when the S&P 500 makes new highs but the FTSE makes new lows, the index we should rely on for direction is the FTSE 100.

 

This is because the FTSE 100, with its large proportion of banks, mining and oil stocks, is a good indicator of the global economy. When the global economy slows the FTSE 100 will be the first index to anticipate the slowdown.
 
Despite what people say the S&P 500 will struggle to rally in the long term. These new highs (if any) won't signal the start of a large rally. You can see this happening right now. This is because there is no fuel left, the manipulations are done, there is nothing else the Fed or Trump can do. This market is just rising on hope, hope that the Fed and Trump can stimulate the market.

 

This kind of market is characterised by slow moves up (and limited in terms of points gained) accompanied by sharp declines like the one we saw in January. I expect this behaviour to persist this year. But right now the FTSE 100 is approaching an important bottom.

 

We will go long when we are ready, meanwhile members of the FTSE short term forecast are enjoying big gains, +710 pts on closed trades and +160 pts on the current open trade, all achieved in the last three months.

 

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

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