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e-Yield Sentiment Indicator (ESI) is neutral but it could turn bullish soon.
One of the components of the ESI, the 34-day BTI is still declining while the second component is rising. This divergence will come to an end when the two indicators points in the same direction. Until then I can’t say with a high degree of certainty if sentiment is bullish or bearish. Given the alternate wave count on the chart below, I expect sentiment to turn bullish sometime in the next few days.
The reason why I think sentiment is more likely to turn bullish is because if we look at what caused the decline ten days ago, disappointing earnings reports, Ukraine crisis and China’s slowdown, nothing has changed except that earnings reports have improved. Investors no longer fear the events in Ukraine or the slowdown in China. Obviously this could change if Russia invades Ukraine, but if the situation does not deteriorate further the market will take it as good news. In the case of China the latest Chinese manufacturing PMI came in at 48.3 which indicates contraction. The strategy in the short term is to use any significant pull back to go long.
Because the FTSE rallied back to the previous high set on 4 April we have an alternate wave count on the chart above. It now appears that the FTSE could be in a triangle pattern where the resistance line drawn from the high on 4 April is the upper line of an ascending triangle [(a),(b),(c),(d),(e)]. This pattern is bullish but it won’t be complete until further consolidation takes place.
In the case of an ascending triangle for wave B (circle), yesterday’s high is the top of wave (b) and today the FTSE should decline as wave (c) down unfolds. A target for wave (c) is 6550. As you can see after wave (c) the FTSE should rally back to the top and then down again so it looks like the FTSE will go sideways until next week. This triangle is wave B (circle) of an upward corrective wave [A,B,C (circle)], this means once the triangle is complete, the FTSE should rally to the 6800 area to complete wave C (circle). This is why I expect sentiment to turn bullish, large counter trend rallies are often accompanied by bullish sentiment.
To learn more about sentiment watch the video: Direct from the Queen Elizabeth Conference Centre a video featuring a UK Investor Show 2014 presentation by Thierry Laduguie on Sentiment Indicators.
Thierry Laduguie is FTSE 100 Trading Strategist at www.e-yield.com
