Chart of the week: will Summer Solstice signal market downturn?

Lack of alternative investment opportunities has fuelled a rally, but there are several warning signs.

Is FTSE 100 on a cliff edge?

Most investors and virtually all professional market analysts and all economists believe price charts are simply pretty pictures that contain little if any forecasting value. I could not disagree more. And today I show charts that are shouting the very likely way directly ahead for the UK market (with the proviso that all forecasts are probabilistic).

My COTW posts this month have intimated strongly that the impressive rally off the Corona Crash lows in March is really a bear market rally and not the start of a new uptrend. And events last week have more than ever convinced me that shares are heading for a lengthy decline very soon.

Last week, I asked: Are shares now poised for a savage decline? I believe they are and, in fact, the decline should be at least as vigorous as the Corona Crash.  

• Chart of the week: are shares poised for more savage declines?
• How it’s possible to justify this stock market rally
• For more technical analysis and charting views, click here

Here is the Dow Jones index covering the recent period:

Source: interactive investor. Past performance is not a guide to future performance.

It is a fact that market turns often (but not always) occur around the times of the two Equinoxes and Solstices. It seems that human behaviour – in the form of share buying/selling at least – also makes a transition as our Mother Earth spins and rotates around our life-giving sun.

The Corona Crash was halted right on this year’s Spring Equinox in March when the market reversed from hard down to hard up. And today at the Summer Solstice, this is an opportune time for a similar transition, but this time from up to down.

If my wave labels are correct, I expect a wave 3 of 3 down – and these are the longest and strongest in the book. Here is the FTSE 100 index showing a similar pattern to the Dow:

Source: interactive investor. Past performance is not a guide to future performance.

The stand-out feature is that after the almost straight-down nature of the Corona Crash, the recovery rally contains mostly overlapping stair-step waves – and this is the hallmark of corrective behaviour to the main trend (down).

Remember, despite the record amount of ‘stimulus’ the US Federal Reserve (and Bank of England) has provided, the Dow is still 13% below its February all-time high, while the FTSE made its record high a full two years ago.

The current rally has carried to the Fibonacci 62% retrace, which is a common target for a complete retracement of the main trend. That target was hit two weeks ago and, since then, we have seen a sharp retreat and, last week, a partial recovery which appears to me to be the final thrust attempt higher.

And to show that wave patterns are not simply random squiggles on a chart (as so many ‘conventional’ analysts believe), here is a close-up of June action on the 4-hour chart:

Source: interactive investor. Past performance is not a guide to future performance.

The resemblance to the daily chart is exceedingly close – a five down and a three up with the up wave terminating at the critical Fibonacci 62% retrace. Here, the momentum divergence is acute, and that clearly signals a very hard decline to come.

The implication is clear: The market is now poised for a magnificent decline in third waves of many degrees of scale. Only an unlikely advance above 6,320 would send me back to my drawing board.

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John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.