FTSE 100: Sideways or Down

While last week decline in the FTSE 100 was a good start to push the 34-day BTI to neutral, the decline stopped and the 34-day BTI is still overbought (above 400). The 34-day BTI is a trend reversal indicator, when it is overbought (above 400) the odds of a trend reversal in the FTSE 100 are high. In this situation the FTSE 100 will pause (sideways) or decline. What is clear is upside is limited, this is why in this situation we sell the rallies. This means that if the FTSE 100 moves higher the rally will not go far, the next move is down.

During the decline the 34-day BTI will drop until it becomes neutral. If the decline is powerful it could push the indicator to the other extreme which is oversold. The behaviour of the indicator is the same whether the FTSE is in a downtrend or uptrend. In a downtrend the indicators becomes oversold, the FTSE rebounds and this push the indicator to neutral, then the decline resumes.

Furthermore the indicator is more reliable when the overbought condition is confirmed by the Elliott wave pattern. An impulse wave is an Elliott wave in five waves [i,ii,iii,iv,v (circle)], when the rally is complete (in five waves) the index will correct. On the chart the FTSE 100 has rallied in five waves since January, this together with the overbought 34-day BTI suggests there is limited or no upside.

Thierry Laduguie is Trading Strategist at www.e-yield.com

 

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