In general I don’t produce long term forecasts (FTSE 100), there are so many events that can happen in a year, the forecast is likely to be off the mark. I am a short term trader focussing on the next few days / few weeks. However, this year we are approaching the end of an interesting pattern on the FTSE 100, namely an ending diagonal. What makes this pattern interesting is the fact that this ending diagonal is huge, it started in 2003 and will end in 2017...read more
Sentiment is bullish but the FTSE 100 has become overbought on my timing indicators (13-day BTI and Top 20 Differential). A pullback lasting more than one day is expected to relieve the overbought condition. What is not clear is whether this pullback will start now or after the rally to 7240.
In the US the rally is running out of steam, the S&P 500 is struggling to make a new high and the Dow has yet to pass the 20K mark. This does not means there won’t be a final rally to new highs, but if there is a rally it will be relatively safe to go short. US markets need to pullback 2 or 3% before rallying to new highs.
Yesterday’s ADP employment report was disappointing, only 153K new jobs added in December, down sharply from the 215K in November. This report is often seen as a benchmark for the nonfarm payrolls report which is due today at 1.30pm. Analysts expect 178K new jobs, if the ADP employment report is anything to go by, today’s nonfarm payrolls will be disappointing and the market could sell off.
We continue to see a strong FTSE relative to the S&P. I believe the FTSE is supported by mining and oil stocks and expectations the pound will drop further in the weeks ahead. It’s all to do with Brexit, the UK is expected to leave the EU at the end of March but there is no deal with the EU, as long as there is no deal between the UK and the EU the pound will drift lower.
The pound will only rally if an agreement is reached or if the economic data in the UK is strong vs the US / EU data. For example yesterday’s UK services PMI beat forecasts and the pound rallied but what we are seeing now is strong economic data coming from the US and the EU, this does not help the pound.
It seems the period of low growth in the EU is over, manufacturing and services PMIs have been growing strongly in line with the UK data. In this environment I expect the FTSE to make new highs (after a short term pullback). The rally is wave C in five waves [i,ii,iii,iv,v (circle)]. Today the FTSE is expected to trade in the range 7140-7200.
The FTSE closed up on the last trading day of 2016 and recorded a new all-time high. I always say that it’s not a good idea to short the index in December, unless we are in a bear market. The bear market has been delayed, and it looks like there will be more upside before the bull market ends.
Last month however, the Santa Claus rally was unusual, the FTSE was very strong relative to the S&P. As noted the FTSE is at a new all-time high but the S&P is more than one percent below its all-time high. This morning I wrote "the rally will probably extend because the S&P is in a fifth wave up and is expected to make a new all-time high". Well I predicted the rally to 7200 last week, see Download FTSE Short Term Forecast 161230
Now I think the FTSE rally has further to go, there is more upside before we go down to 6900. So I have a new short term forecast. I think 2017 will be an excellent year to short the FTSE 100. To receive regular analysis and trading signals on the FTSE 100 subscribe to the FTSE 100 short term forecast
We need to think about an alternate scenario because the market is bullish, for example the rise in the dollar was supposed to be bad for the S&P, look at the S&P, it’s on fire. The drop in bond prices was supposed to be bad for the S&P, because yields are rising, but US investors ignore the bad news. The Dow Jones is near 20,000. And what about US interest rates? They are on the rise yet the market is resilient. The strength of the Dollar could well push the GBP/USD to new lows, this would be bullish for the FTSE. What about oil? Check the chart, it’s trading at multi-month highs. Oil stocks are strong and they are helping the FTSE rally, Yet the FTSE is overbought based on the Top 20 Differential, upside is limited. This is why I am looking to sell call options. Today I think the FTSE 100 will trade in the range 6960-7020.
Once again the two sentiment indicators are not confirming each other, we cannot say if sentiment is bullish or bearish. But the turn down in the BTI at a time when the market is rallying is unusual. A declining BTI is bearish, now we need the 34-day BTI to turn down too in order to conclude sentiment is bearish. What we can say is that the odds of a pullback have increased. The question is, will it a small pullback or something more significant? I think it will be a small pullback based on the pattern and also because next week we enter a bullish seasonal period, I can’t see a large drop over the Christmas period, unless something new and unexpected occurs. In the last two weeks of December volumes will drop and the market tends to go up. I suspect this period will coincide with the final move up in the FTSE 100. At the ECB meeting yesterday the news was mixed, the ECB extended their asset purchase program but they reduced the monthly amount. Today the FTSE 100 is likely to trade in the range 6870-6950.