Despite a rising GBPUSD the FTSE 100 was very strong last week when profit takers moved in. If the current decline is a short term move lasting less than a week sentiment will remain bullish. Sentiment is bullish and it should remain bullish because I don’t think we are at the start of a long term decline. At the end of the decline the Top 20 Differential which is a timing indicator, should be neutral or oversold. Right now it’s still overbought. I think the reason it has not yet turned neutral is because Unilever is still going up, the stock has been boosted by a takeover on the company and it is keeping the Differential overbought. If we remove Unilever the Differential would be neutral.
Concerns remain about high valuations and the ability of the US administration to deliver on its promises, but we are in a bull market, investors won’t let the stock market drop too low unless we have something new and bearish for the markets. The pound has been climbing for more than a week against the US dollar, it would appear that GBPUSD is forming a bearish triangle [a,b,c,d,e (circle)]:
Since the low in October GBPUSD has been going sideways in five waves, the current rally is the final wave up inside the triangle [wave e (circle)]. This wave should end near 1.2600, the next move will be a long decline, the pound should make new lows. This decline will boost the FTSE and because the S&P is near the end of a correction and is expected to rally, there is a good chance the FTSE 100 will rally to new highs in the next few weeks.
The pattern in the FTSE is still not clear, it could be a running flat in three waves where the current decline is the final wave of the decline. Because the FTSE has rallied some 350 pts since the low in February, the correction will be proportionate. The 50% retracement of the previous rally is at 7270, the 62% retracement is at 7228, the decline could end anywhere between these levels.