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The S&P 500 is hitting new highs, meanwhile the FTSE 100 is still trading below its high of 6905 recorded on 4th September. The lagging nature of the FTSE 100 has been a regular feature in the last twelve months. Because the decline from 4th September is in five waves and follows the completion of a long term ending diagonal, we can say with confidence that the FTSE 100 is already in a bear market. The S&P however is still in a bull market. What does this tell us? This tells us that a change is taking place, the global bull market is coming to an end and the FTSE 100 is leading the way.
A few days ago our sentiment indicator (BTI) turned bullish but the next day it was bearish again. The indicator has been bearish for more than two weeks and is not confirming the FTSE rally (bearish divergence). Furthermore the shape of the rally is not impulsive but corrective. This suggests that the rally is a counter trend move and not part of a long term advance. This would confirm the view that the UK index is in a bear market.
Yesterday the rally got a boost during the ECB press conference and today the rally could extend further after the release of the latest nonfarm payrolls at 1.30pm. According to Reuters, employers probably added 231,000 jobs in October. A better than expected figure would boost stocks. But upside is limited, the over extended rally in the US can be seen as the last leg up in a long bull market. I predict a period of uncertainty starting next week, continuing deterioration of the Eurozone economy, rising tensions between Russia and the West and a possible resumption of the conflict in Ukraine.
Against this background, seasonal influence is positive. We are in the “Santa Claus rally” period which covers November-December. Stocks tend to rise during this period. As you can see there is long way to go until the end of December. Will the rally extend for the next seven weeks? Possibly but probably not based on the wave count. This counter trend rally which is wave 2 is nearing an end but we have a dilemma and it’s going to be tough trying to short this market during the last two months of the year.
Looking at past patterns there have been some November-December periods when stocks fell. For example last year the FTSE declined from 30 October to 13 December. Last year the Santa Claus rally occurred in the last two weeks of December. I think we are not far away from a significant decline because the US markets are overbought and in the UK the trend is down and we are in the final subdivisions of an upward triple zigzag. There may be more upside early next week but the next move should be a decline to 6200.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
