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Sentiment is still bullish and stock markets rallied further on positive news. Markets were lifted by strong US housing starts and building permits on Tuesday, and strong earnings from Dow component Home Depot. Investors are focusing on the economy and earnings instead of geopolitical concerns, however, the situation in Iraq and Ukraine is volatile and violence could escalate at any time.
For now the trend is up and our timing indicators 13-day BTI and Top 20 Differential are no way near overbought (13-day BTI below 400, Top 20 Differential below 2.5%). Therefore, the rally should continue. These escalations of violence create buying opportunities, when sentiment is positive investors are not afraid to buy the dip. I suspect there will be another opportunity to buy the dip in the next few days.
The FTSE has rallied strongly in the past ten days, the index is now back above the 200-day moving average. Many fund managers see a move above the 200-day moving average as a reason to buy, the fact that the index is above the average will attract buyers. Yet, markets don’t move up in a straight line, the FTSE has not had any significant pull back since 8 August, there is now a good chance the index will pull back and this will provide an opportunity to buy.
The reason is because the rally can be counted in five waves [(i),(ii),(iii),(iv),(v)]. Markets generally pull back after completing five waves up. The current move up in five waves is wave a (circle) of an upward zigzag [a,b,c (circle)]. The next move should be wave b (circle) down and the target is near an area between the 38.2% retracement at 6686 which is a minimum retracement for wave b (circle) and the 55-period moving average at 6664. In an uptrend prices tend to pull back to the 55-period moving average before moving higher. Longer term the FTSE has the potential to rally to 6930 as the next move after wave b (circle) will be wave c (circle).
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
