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The FTSE 100 broke above the January high at 6903, this means the rally from last year low is still in progress and we now have five waves up. Yet a new high does not mean the start of a new bull market, here the new high is the fifth wave (wave E) of the pattern which is the final move up. Stock markets are due for a correction, rallies end in five waves.
But sometimes the correction is delayed by the news. If the news is positive markets will rally and the correction will be delayed. We saw a good nonfarm payrolls report last week and yesterday the FOMC statement did not mention anything about tapering QE which is good news so markets continue to rally. But Fed officials are watching the numbers, as the economy re-opens and when full employment is achieved they will reduce or stop QE and this is when stocks will go down.
Everybody knows QE cannot continue, it was a temporary solution following the financial crisis of 2008. When the economy returns to full employment inflation will accelerate. If you add QE to an economy that is already roaring, inflation will surge and this would be negative for the stock market because interest rates would have to rise significantly. Debt levels are so high that governments can’t afford higher rates. As most people know what is going to happen investors are not going to wait until it happens, they will get out of the stock market way before it happens, this is why the correction could start at any time. It is always difficult to know when people will turn bearish, that is the difficulty.
If we look at the weekly chart of FTSE 100 we can see the pattern from the low last year:
A move above 6903 creates five waves up [A,B,C,D,E] which is the signature of a terminal pattern. Rallies end in five waves, plus we have many other indicators pointing to an imminent top. Whether you look at the put/call ratio or sentiment or my own 34-day BTI which was above 400 a few days ago (not anymore), they all point to a rally that is nearing an end. Wave C appears to be in three waves and wave D overlapped wave A, this is the structure of a rising wedge which is wave (X). Wave E inside wave (X) is not yet complete, I think the rally will extend to 7000 and that will probably the level where the rally end.
Thierry Laduguie is Trading Strategist at www.e-yield.com
