Interactive Investor

Chart of the week: Predict what FTSE 100 will do next using these clues

22nd January 2018 11:20

John Burford from interactive investor

Technical analyst John Burford discusses record highs, big corrections and likely FTSE 100 behaviour over the next few months. It's a fascinating read.

FTSE 100 poised for more gains

Since January 2016, trading the FTSE has been far far trickier than trading the major US indexes. Here is the weekly Dow chart from January 2016.


Deep corrections have been largely missing, especially since December 2016, and staying long has been one of the easiest plays I have ever experienced in a two-year period. Isn't that extraordinary?

But the FTSE has been a nightmare in comparison - and staying long has been fraught with danger - deep corrections of 10% were common. But the overall trend remained up and that was the correct stance - if you could stand the reversals.

This was where the 'buying on dips' strategy really paid off - and limited potential losses. But how do you use this strategy wisely?

In a bull trend, which the FTSE is definitely in, major waves up are always in 'fives', and major corrections down are always in 'threes'. That is one of the Elliott Wave rules which has been verified time after time.

So, from January 2016, the large wave up was a five (in green) and the March-May correction was a three (yellow). And that pattern has been repeated accurately up to today.


So what clues are there to suggest when the dip is over and the market ready to turn back up? One very easy one is to wait for the third wave down to exceed the low of the first wave. Then start to look for your entry that can give you a low-risk trade to your stop. I use the Fibonacci levels to aid me in this.

 Let's say you are long and watched as the market pushed up firmly past the chart resistance at the 7,600 level on 21 December in a very bullish Santa Rally show of strength.

The rally from the December low is very strong and comparable with the surge exactly two years ago (far left of chart). Because I am always looking for a place to take at least some profits on strength, my analysis suggests we are very close to a major high. Here is a close-up of recent action:


We have a long and strong section which is totally characteristic of third waves and we are just emerging from a typical three down wave 4 correction to last week's low.

I also have drawn a tramline joining waves 2 and 4, which is standard practice among Elliotticians. The upper parallel tramline starts at a Prior Pivot Point (PPP) and closely touches several highs.

The clear implication is that the market needs just one more push up in wave 5 to new highs before the entire five-up wave off the December 2016 lows can be considered complete. It could possibly reach my upper tramline in the 7,900 area (or above), depending on the shape of the sub-waves to come.

And after that? Perhaps we shall see the first decent correction of more than 10%.

A move down below the 7,680 level near-term would at least delay the above outcome. But today, odds favour my bullish scenario.

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