FTSE trading conditions should improve in the short term with both S&P 500 and GBP/USD providing some support.
Sentiment remained bullish during the decline which is a bullish divergence and a signal to go long. Despite the loss of confidence in the US administration investors appear in bullish mood and this means each time the market declines the decline will be short lived. The only thing is that pullbacks are proportionate to previous rallies, so the larger the rally the larger the pullback. In the UK the FTSE has retraced between 50% and 62% of the previous rally which is about right but in the US the decline is not large. If we assume that wave 3 started on 4 November last year, the S&P has retraced less than 38% of wave 3 which is not enough. Of course this depends on where wave 3 started, if this wave started higher the retracement will be larger and this is acceptable.
The latest pullback in the US dollar has given a boost to the pound. As expected the rally in GBP/USD extended, the high so far is 1.2615. GBP/USD is near the upper line of a triangle [a,b,c,d,e (circle)]:
The upper line is at 1.2635, can we assume that yesterday’s high at 1.2615 is the top of wave e (circle)? If it is the triangle is complete and the pound is at the start of a long decline, this decline will push the FTSE higher. The wave count on GBP/USD is in agreement with the wave count on the FTSE. The bottom line is we are at the start of a long rally but there is a risk, the risk is a larger decline in the S&P. As noted above the pullback in the S&P is not large, this is why there is risk of a larger pullback.
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