I think investors are coming to the conclusion that central banks can’t push the market higher anymore. It’s taken a long time for people to realise this, two or three years ago I was warning that investors would lose confidence in the central banks and that would coincide with the top in the stock market. Well, it’s incredible how people can remain optimistic for so long. Does that mean we are near the top now? Anything is possible but probably not as per my forecast.
I am not saying we are in a bull market, I am saying the bull trend is coming to an end. We could see higher prices in the short/medium term. It will take more than a 3% or 4% decline in the S&P to kill the appetite for stocks in the US. US investors see any decline as an opportunity to buy more stocks, the S&P has been one of the most resilient indexes I am watching. Each time the S&P dips, it rallies to new highs and the short to medium term pattern looks bullish to me.
The most reliable indicator of market tops is the 34-day BTI, when this indicator is overbought there is a high probability the FTSE 100 will decline for more than two weeks. It becomes overbought when the stock market is driven by a high level of optimism. This indicator was overbought in August and the FTSE declined, the decline is one month old. Right now it's neutral.
The FTSE 100 failed to make a new low yesterday (below 6654.5), there was a dip below that level in after hours but this action does not count. The Elliott wave pattern is recorded between 8am and 4.30pm (normal market hours). This means there is a chance the decline ended at 6654.5 as per the alternate wave count.
The index was influenced by lower oil prices and a sharp decline in the S&P, the US index retraced a very large portion of the previous day’s rally. Sentiment is still bearish which is not an ideal situation to go long.
The truth is most market bottoms occur on bearish sentiment. If we buy near the bottom the profit potential is greater than if we wait for sentiment to turn bullish which often happen when the rally is already underway. That is why it is worth picking the bottom. We are near a bottom when we have a completed Elliott wave in three or five waves and, ideally, when one of the timing indicators is oversold. Here the we don’t have an oversold indicator but the 13-day BTI (e-Yield indicator) is near oversold (-349), a move to -400 or lower is oversold. So despite bearish sentiment, we are near a bottom.
We have two scenarios in the short term. In the first scenario yesterday’s rally to 6724.7 was a fourth wave inside the current decline. The next move is the fifth wave down to 6630. In this case the decline will end near 6630.
If we are in the alternate wave count (chart below), the decline ended at 6654.5. It’s possible to interpret wave 4 in seven waves [a,b,c,x,a,b,c (circle)] which is a double zigzag. In this case the decline ended at 6654.5. This scenario is supported by the S&P because the US index failed to make a new low yesterday. If the S&P rallies as I expect the FTSE is not going lower. In this case today's bounce is the start of a short term rally.
Investors pushed the index lower on Friday and today the decline extended. The real action occurred in after hours on Friday when the S&P broke below a key support level. The FTSE has some catching up to do and the decline could extend further. The FTSE broke beoq its previous low  an indication the correction is not complete. The sell off was triggered by North Korea nuclear test and fear of higher interest rates according to financial websites. The media like to give a reason for the market behaviour, the truth is the sell off was a natural thing caused by profit taking. After a strong rally (wave 3) investors will take profits (wave 4), so the move down is normal. The problem here is to identify the end of wave 4 because we have a wide range where it could end. Basically the more the FTSE goes up during wave 3, the larger wave 4 will be (wider range). The fourth wave tends to end in the area around the 38.2% retracement of wave 3, that level is 6510. I am not saying the FTSE will go to 6510, many fourth waves end above the 38.2% and between the top and the 38.2% retracement. This is where we are now.
Sentiment turned bearish a few days ago and the stock market is expected to go down as a result but the S&P 500 is resilient. It’s possible a bottom is already in place in the S&P. The US economy is not firing on all cylinders but it is not slowing down either. That is a perfect environment for stocks, this is why I think the S&P will make a new high...read more