The Top 20 Differential was oversold two days ago, this meant the FTSE 100 prediction was up, I expected a bounce to relieve the oversold condition. We had the bounce yesterday and the Top 20 Differential is no longer oversold. But the rally carried further than expected. The rally retraced nearly 62% of the previous decline which is a third wave. If the rally is the fourth wave the move is too large for a fourth wave. The 62% retracement is at 7285, we reached that level today. The alternative scenario is that yesterday’s rally is wave a of a triangle [a,b,c,d,e] inside the fourth wave. The first wave of a triangle can retrace a large portion of the third wave but the rally must stop now, a move past 7300 would increase the odds of a trend reversal from down to up.
If we assume that we have a triangle [a,b,c,d,e] inside the fourth wave, the next move is wave b down to 7130. Then the index will bounce back to complete wave c and it will move sideways to complete wave d and e. For that to happen we will need some help from the S&P, the US index is still in a downtrend but yesterday it was flirting with a key resistance level, an indication the S&P wants to go up. The FTSE is unlikely to go down if the trend in the S&P has turned up. The FTSE is now in a resistance area on a previous support line crossing 7282, the decline must resume immediately otherwise there is a risk the trend will turn up.
The pound is expected to rally in the next few days, this is bearish for the FTSE. Since GBP/USD broke out of a triangle, the rally should be in five waves [(i),(ii),(iii),(iv),(v)]. As you can see on the chart we are now in wave (iv):
The consolidation following the sharp rally last week is wave (iv). This move is either complete in three waves or it will carry on sideways for a bit longer (triangle). The next move is wave (v) up and the target is 1.3000. The rally in GBP/USD will coincide with a decline in the FTSE [wave b]. What’s not clear is what the S&P 500 will do today, if the US index rallies, the FTSE will push higher. So strength in GBP/USD and bearish wave count could be offset by the strength of the S&P 500.
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