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The FTSE 100 has rallied strongly in the last two days. If the bounce was counter trend, it should have ended near 6900. The rally above 6900 is bullish and not consistent with a counter trend bounce that is running out of steam. This morning the index tested the previous high at 6937.4.
The current rally was triggered by a jump in crude oil last night. OPEC members agreed to cut oil output yesterday, the news pushed oil to a three-week high. Some of the largest companies in the FTSE 100 are oil companies, they are rallying today and this is why the FTSE is strong.
Yet there are other large companies in the FTSE 100 like banks and they are sliding. Let’s not forget that we have some negative factors to watch in the banking sector, in particular Deutsche bank. The stock rallied yesterday but we can’t rule out another leg down. I still believe that the market will hesitate to move higher in the short term unless investor stop to worry about the state of banking sector. But the pattern is bullish and a break above 6937.4 would increase the odds of a rally in the short term.
When sentiment is bullish odds favour a rally. Sentiment as measured by the BTI (sentiment indicator) is bullish right now. A break above this morning’s high would confirm a rally in five waves [(i),(ii),(iii),(iv),(v)]. A rally in five waves means the trend is up and this is generally confirmed by the BTI. Once the FTSE has moved up in five waves, the next move is a pullback to correct a portion of the rally. Therefore, even if the trend is up we should see a pullback to the 6850 area before the index moves higher and near 7000.
Thierry Laduguie is Trading Strategist at www.e-yield.com
