Late last week buyers obviously reckoned that they could see a good buying opportunity as they returned to the market in force. The result was that the FTSE 100 closed at the top of its range for the week.
The low for the week was right on the support level that we had identified for members a week earlier!
The FTSE is now in something of a state of limbo. There is the possibility that it might claw its way back up to the 5670 area and even, possibly, to the 5750 area as it is a fact that there is always a positive period that follows such a steep collapse as the FTSE has suffered over the past two weeks.
This ‘limbo’ period is a dangerous time as a sense of ‘recovery’ can fill the air and buyers begin to lose their caution and start doubling up on their earlier purchases so as not to miss out on the expected recovery (the earlier concerns about the state of the market being explained away as “over reaction”).
But, beware, because it is a fact that, until it changes, the market is still in the early phase of a stage 4 Downtrend which, by its very nature, will follow through with more declines in share values after the bounce. It has happened before -
Click on the cart to enlarge it
It is likely that the FTSE 100 will fall to test the strength of the support at the 4782 level again at some point. If it should close below that level then we can expect more falls and, perhaps, a decline all the way down to the 3475 level again.
So, enjoy and benefit from any sustained bounce that the FTSE may provide over the coming weeks but remember it is in a Downtrend as its dominant trend and that it will, therefore, fall back again.
Many investors and traders make the mistake of looking at yesterday’s market action to try and get an idea of how it will move today or tomorrow. This is far too short a time frame. We zoom out and look at the long term (weekly) trends as these are the dominant trends that will dictate the overall direction that the market will follow for weeks or months and sometimes years ahead – with all of the daily vacillations being ‘noise’ and impossible to accurately read.
That is why we learned to use the ‘satellite approach’ to look down on the longer term dominant trends to establish how best to structure a current investment strategy.
Looking back over the last 13 years history of the FTSE 100 it has entered a ‘Stage 3’ Topping (or Distribution) trend a total of 6 times. The results have not, though, always been the same. Given that a ‘Stage 3’ trend can only set in after a ‘Stage 2’ Uptrend the danger to be aware of is that the ‘Stage 3’ trend itself is likely to be followed by a ‘Stage 4’ Downtrend but, and as can be seen from the chart below, that seems to depend on the strength and length of the preceding ‘Stage 2’ Uptrend -
( Click on the chart to enlarge it)
Working from left to right we can see that the first ‘Stage 3’ period persisted from June 1999 to Sep 2001, a total of some 27 months as the long Uptrend exhausted itself before it morphed into a strong ‘Stage 4’ Downtrend. Then, following the swing into a ‘Stage 2’ Uptrend after the March 203 bottom, the next two ‘Stage 3’s were comparatively short and were followed by a return to the (unfinished) Uptrend. The next topping ‘Stage 3’ trend occurred after the Uptrend had become exhausted and it ran from July 2007 to July 2008 before it too morphed into a another steep ‘Stage 4’ Downtrend.
The 2010 ‘Stage 3’ trend was followed by another Up leg and so the question now hangs there – will the 2011 ‘Stage 3’ be followed by another Up leg or by a swing into a ‘Stage 4’ Downtrend?
To answer that question, at least temporarily, we look to the various technical signals; these do still indicate that the balance of probability is that the 2011 ‘Stage 3’ trend will be followed by a return to the Uptrend.
Of course, this cannot be guaranteed but it is going to be relatively easy to read because a break back above the 30wk Moving Average will be the first signal of a return to the Uptrend; whereas a new top forming at or below the 30 wk MA will be the first strong signal of an impending ‘Stage 4’ Downtrend.
A brief look across to Wall Street shows that the trend of the mighty S&P 500 might be swinging into the start of a ‘Stage 3’ trend although it is too early yet to be able to be definitive.
A look back over the last 13 years of the S&P 500 shows a similar picture to that presented by the FTSE 100 – that the longer ‘Stage 3’ trends tend to be followed by sharp, lengthy, ‘Stage 4’ Downtrends whereas the shorter ‘Stage 3’ periods tend to return to the dominant ‘Stage 2’ Uptrend -
Most people, respected market commentators included, tend to think that there are only two trends – Up and Down – and that any market move that does not fit into them is ‘trendless’. Wrong! There are 4 distinct trends with ‘Stage 1’ (Accumulation) trend and ‘Stage 3’ (Topping) trend being powerful technical indicators in their own right.
A ‘Stage 3’ Topping trend tends to reflect not just the balancing effect of the buying and selling activities of the ‘bulls’ and ‘bears’ but, particularly, it reflects the nervous environment prior to the market making a definitive move, up or down and, as commented above, the technical signals given towards the end of a ‘Stage 3’ trend will tend to be reliable indicators the likely future direction of the index.
At the moment the, so far short, ‘Stage 3’ trend of the FTSE 100 looks likely to be followed by a further up move – but please don’t put the children’s inheritance on it as it could change very quickly, such can be the market volatility during a ‘Stage 3’ Topping trend.
The FTSE 100 is sitting above potential support in the form of the 5770 level and the 5720 level – being the ‘standard’ support of the -6.25% from the recent run of highs at the 6100 area; there is also the 5594 level a bit lower which should provide support if needed as it is a standard support level of -8.33% from the highs which has already provided support once, back in March -
(click on chart to enlarge it)
The FTSE 100 is at a point of decision. It is swinging into a ‘Stage 3’ Topping Trend as the 2010 (‘Stage 2’) Uptrend has lost its momentum.
Although a ‘Stage 3’ trend is usually followed by a ‘Stage 4’ Downtrend it is not always the case and it can be that the index will yet break out to the upside again beginning another ‘Stage 2’ up leg. There is still time for it to do this before a proper ‘Stage 4’ Downtrend appears.
The current ‘Stage 3’ trend is shown on the chart below (the shaded area) together with the previous two ‘Stage 3’ trends in the last 5 years; one followed by a (long) Downtrend and the other by a further ‘Stage 2’ up leg -
The FTSE 100, weekly prices -
With the potential support at 5770 and 5720 there is some cause for optimism that this ‘Stage 3’ trend might not morph into a full blown ‘Stage 4’ Downtrend but rather return for a second leg Uptrend.
Another plus factor is that the rest of the UK market is continuing to move within a ‘Stage 2’ Uptrend with no signs (yet anyway) of swinging into a ‘Stage 3’ trend. It has to be observed though that the FTSE 250 index does have potentially strong resistance just above its present position in the form of its all-time-high price at 12236 -
The rest of the analysis, which includes the S&P 500 and the DJIA, is available on request to admin@sharehunter.com
The FTSE is still in the grip of the 5974/6055 area of resistance and is close to losing the support of its 30wk Moving Average.
It is not looking too promising. Much now depends on the coming week and whether or not the FTSE can pull itself back above, or at least to, the level of its 30wk Moving Average (which is currently at 5923) -
(Click on chart to enlarge it)
The signal being given by its fall below its 30wk MA – combined with the sideways move over the last 21 weeks (yes, it’s that long) – is that the index could be in process of a swing into a ‘Stage 3’ Distribution (or ‘Topping’) trend.
The significance of this is that a ‘Stage 3’ trend is usually a pre-curser to a swing into a ‘Stage 4’ Downtrend. Added to which the Triple Top formation can be clearly identified which, of itself, can lead to a steep, sometimes fast, decline.
A reminder of the 4 Stages in which the market moves -
So, the poor old FTSE is not promising much at all although there is time yet, just, for it to recover and rally back above its 30wk MA. There are occasions when a ‘Stage 3’ trend is followed by a return to a ‘Stage 2 Uptrend (although these are far fewer than a swing into a Downtrending ‘Stage 4’).
And there are some positive signs elsewhere that might have a beneficial influence on the FTSE and help it to recover or, at least, to avoid a collapse. These are detailed in the latest ‘FTSE Forecast’ Report which is available on request to admin@sharehunter.com
Our up to date analysis of where the FTSE 100 is headed is available on request. A brief extract is ….
The current rally has taken the index up to a test of the 5770 level. The 5770 level is producing resistance and, if this is maintained, it could have a detrimental impact on the current (short-term) Uptrend and could, at worst, push the index back down towards another test for support at the 5010/5190 area.
However the strength inherent in the current rally is such as to suggest that there will only be a short retracement before the index resumes its upwards path and moves up towards a test of the 6000 level area.
The rise in the FTSE last week has taken the index to the same level that it was at 10 months ago. Nothing exceptional about that, you may say. But the point is that this is getting towards the end of the historical maximum period before the market ‘blows off’ – one way or the other.
Looking back over the last 9 years of the FTSE 100 index you can see from the chart below (click on it to enlarge it) that each time there has been a lengthy sideways period (of Consolidation or Distribution) it has been followed by a significant move -
It is during such follow-up moves, up or down, that significant profits can be made.
The current period is further enhanced by the extra compression that comes from the coming together of the two moving averages. These two are good trend identifiers but, when ‘mixing’ together they indicate a building compression which will, eventually, be released by a strong move. And, after 10 months of sidling along, such a move is due soon.
All of this tends to support our view that this Autumn will see the FTSE move decisively.
We are ready for it. Are you?
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