Chart of the week: FTSE 100's 'very reliable' line of support

Is the FBI manipulating the market?

Just when you thought there could be no more surprises in the US election campaigns, up pops the FBI again and puts Hillary leading by a head. Naturally, that goosed global stockmarkets and crushed gold and rallied the dollar overnight.

You have to wonder if they have a trading room at HQ.

On Friday, the FTSE 100 descended to the 6,650 level after days of declines. But that is where I have a major line of support. Here is the chart I prepared on Friday:

Friday's low is the fourth touch point on this blue line which also sports a "prior pivot point" in early July. According to my tramline trading rules, this is a very reliable line of support. But if it gives way, it will become a line of resistance with downside targets marked.

Only a month ago, the FTSE was pushing above the 7,100 level and so had lost 450 points, or about 6%. But what about 6,650, where I have my major line of support?

This morning, that line is holding, with FTSE bouncing off it in fine style. Of course, tomorrow's election should stir up the emotions even more into Wednesday (and beyond) and very likely produce even more wild swings.

So much is being written about what effect either Hillary or "The Donald" prevailing will have on the markets. A lot of ink is being spilled by earnest gurus on the subject. Remember pre-Brexit when the very same experts were confidently predicting a Remain win and a market rally?

We may see a repeat of the 'Brexit effect', where shares dropped hard, then screamed higherWe got the wipe-out first and then the rally. How many predicted that outcome?

I pay little heed to such analysis and rely on chart pattern-reading combined with sentiment analysis. In the end, that is what drives the markets.

Although there could be very high emotions surrounding the election result (especially if Donald Trump prevails) and rapid and large swings could be on the cards, we could see a repeat of the "Brexit effect", where shares dropped hard only to find a base before screaming higher and higher. The Elliott wave pattern suggests this is a possibility.

That is because the form of the decline off the top is in three waves so far, and this is characteristic of a correction, not the main trend, which is up.

Of course, if the market can break hard below my blue line of support in the days ahead, that interpretation would be less likely and we should be seeing a five-wave down pattern – and here is an example of what I mean.

Amazon traces out a five-down

Last week, I covered the Amazon story and showed that the 7% plunge on 27 October was a significant event - and almost certainly signalled a turnaround of the bullish trend that had been in place for years.

Today I want to offer more evidence that this indeed is the case which has been revealed in last week's price action.

Remember, this share has been one of the "FAANG" quintet of tech companies that has driven the NASDAQ to its all-time high in recent weeks.

In fact, it has been calculated that the FAA trio of Amazon, Apple and Facebook has accounted for 20% of the entire NASDAQ 100 index gain so far this year. There are few generals, but many soldiers. Odds are that unless you hold any of these shares, any of the other Nasdaq 100 issues could be under water.

This is the chart showing the incredible rise of AMZ since 2002 (most of that time losing much money).

If you squint a little, I am sure you can see five waves up, with wave one reaching $400 in late 2013, wave three at $680 in late 2015 and wave five at the $850 high on 10 October.

On the weekly chart, I have a momentum divergence between waves three and five. So the recent high is a good candidate for a major top - perhaps the all-time top, but that cannot be deduced just yet.

To verify I have a major top, I need to see a small-scale "five waves down" - and I now have one to Friday's $753 low.

I expect a three-wave pattern up which could reach the $800 level and, if there is a clear A-B-C pattern in coming days, I have my first major confirmation that the trend has changed to down and the $850 high will hold.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.