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The divergence between the S&P 500 and the FTSE 100 remains in place. The S&P is making new highs but the FTSE is below its January high. There may not be much action today ahead of the US employment report to be released at 1.30pm. Expectations for today’s nonfarm payrolls are for a gain of 150K new jobs. The market will be volatile after the announcement, as always it is not recommended to trade intraday at that time.
The concern is the divergence between the FTSE and the S&P. Based on the S&P’s pattern a decline is expected in the short term, however in the case of FTSE UK stocks are in the midst of an advance. The indicators 13-day BTI and Top 20 Differential are not at levels associated with a top and the wave pattern points to the middle of an uptrend.
It is difficult to predict how the market will react if we get a big miss at 1.30pm. The only thing I can say is that the US market is near a top, if we see a rally after 1.30pm chances are this rally will be completely retraced after the US markets open at 2.30pm. I believe that the FTSE is leading the S&P so the fact that the FTSE is not moving up and not following the S&P higher is an indication that the S&P will pull back.
While the FTSE is in the middle of an advance, a pull back in the S&P would drag the FTSE lower in the short term. This would produce an extended pull back to 6650-6700 before the UK index starts its final move up to 7000. At this stage investors should reduce their long exposure because there is potential for a larger decline in the S&P (depending on which wave count we adopt). A larger decline means the FTSE could decline below 6650 below the next rally starts. Sentiment is positive therefore we must treat any decline as a corrective wave. Once this decline is over the FTSE should rally to the 6700 area.
Thierry Laduguie is FTSE 100 Trading Strategist at www.e-yield.com
