Interactive Investor

Chart of the week: my bearish FTSE 100 forecast remains on track

26th September 2022 12:36

by John Burford from interactive investor

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Having already predicted a sharp correction in September, analyst John Burford believes we should brace ourselves for further losses. Here’s his new forecast plus an investment that can flourish in a bear market.

bear graph chart 600

In my last Chart of the Week on the FTSE 100 index on 30 August, my strong forecast was for a period of strong selling and the index to begin a hard down phase provided the recent high was not exceeded. 

This is what I wrote then: “If the current bounce terminates around here (latest 7,480), I expect to see a very hard down phase into September, which is usually a poor month for equities.”

And now, a month later, the index is trading down to the 7,000 mark as I write for a loss of 6.6% since 18 August. This was the chart I posted back then:

FTSE 100 daily chart September 2022

Past performance is not a guide to future performance.

The wave labels were telling me as clearly as could be that the market was at the start of a wave 3 of 3 down, with the first target at the lower tramline around 7,200. 

Breaking below that would set up a test of the 7,100 wave 'b' low of late June. And breaking below that would help confirm the very bearish picture with the next target the sub-6,800 wave 1 low of last March.

In Elliott wave terms, a third wave is usually long and strong with intermittent sharp but brief counter-trend rallies. But a third of a third is a third wave on steroids. They take no prisoners in their relentless march in one direction. They often reach low levels unimagined by most pundits at their inception.

In fact, in a bear market they are a great destroyer of wealth, if I can be so blunt.

And with the pre-Federal Reserve bounce on 15 September, we are in another third wave lower, making the entire wave a third of a third of a third – an even more devastating move.

Here is the updated daily chart:

FTSE 100 daily chart two September 2022

Past performance is not a guide to future performance.

Why do I believe the market will descend to extremely low levels on this path down? Simply because bullish sentiment remains high (but falling). Most investors are still looking to buy something (positive sentiment). As the bear market progresses, more will be looking to get into cash – or seek investments that can flourish in a bear market (see below).

Markets are suffering from last week's seismic shock from the 180-degree turn by the UK government of its fiscal policy, with tax cuts galore. Who saw that coming?

Indeed, when the passing of Queen Elizabeth was announced, the thought occurred to me that a new era in finance was upon us, and it was likely to be the very opposite of that which characterised her reign of great wealth creation based on the ascent of common stocks.

But the market's bearish reaction last week was foretold by wave analysis that pointed to the above outcome in my updated chart. Bad news follows in a bear market (and vice versa).

Is there any share that can provide a positive return in a bear market (that is likely to impact all sectors)? In fact, there is. It is none other than an inverse index ETF that I have mentioned previously.

Here is the Xtrackers FTSE 100 Short Daily Swap ETF (LSE:XUKS)

Xtrackers FTSE 100 Short Daily Swap chart

Past performance is not a guide to future performance.

It has been trading between the tramlines for a few months (inverse to those on my FTSE charts) and is poised to break up out of them. Note the highs reached in the corona crash of March 2020. I fully expect these levels to be tested again.

John Burford is a freelance contributor and not a direct employee of interactive investor.

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