Interactive Investor

Chart of the week: Will FTSE 100 resume its rally?

14th November 2016 12:48

John Burford from interactive investor

Huge Trump whipsaw in FTSE

In June we had the shock of Brexit, where the immediate reaction to the vote result was a big sell-off, rapidly followed within hours by a powerful rally in a terrific Brexit "whipsaw" pattern.

And last week, we had an identical whipsaw reaction to the Trump win. Who says lightning never strikes twice?

This is what I wrote last Monday before the result was known:

"Although there could be very high emotions surrounding the election result (especially if The Donald 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 and scream higher and higher. The Elliott wave pattern suggests this is a possibility."

Lightning did indeed strike twice.

Most of us are not in front of our screens day-trading all day long, so that was why I advised most traders to either lighten up positions ahead of Wednesday or stand aside. That would have avoided the Trump whipsaw action, which almost certainly created losses for both bulls and bears.

Such divergences show a fractured market - now even the generals are giving groundWhereas the Dow made a new all-time high last week, the FTSE 100 has lagged as sterling has recovered. The FTSE got a major boost as sterling fell hard in the previous week - a week is a long time, not just in politics but in the markets.

And the lag with the Dow is stark. On Friday, FTSE was down 250 points from Thursday's 7,000 high, while the Dow was only about 70 pips off its Thursday high. There are even more divergences in the US indices, with the S&P 500 failing to make a new high last week.

Such divergences demonstrate a fractured stockmarket - and now even the generals such as Facebook are giving ground. The move out of riskier shares into solid blue-chips in the Dow is most definitely a result of a growing risk-off sentiment, which is highlighted by gold's decline of $100 in recent days.

Last week, I showed the major support line at around 6,650. And in last week's frantic action, that support was breached. Here is the updated daily chart:

The spike occurred right after the news that Trump would likely win, but by the end the day the market had fully recovered and there was no close below the support line. Indeed, the close was well above it and negated any bearish signal given by the breach.

Here is the FTSE 100 hourly chart, showing the Trump whipsaw that occurred in a matter of a few hours:

On Wednesday, in the early hours, the initial reaction was a plunge of over 300 points, but the recovery started and by Thursday the market rallied to the 7,000 level, although on a large momentum divergence, showing the rally was running out of steam.

It duly fell back on Friday in what looks like an A-B-C counter-trend decline, with the C wave turning at the Fibonacci 62% support level.

That little move from 7,000 to the 6,700 area of around 300 pips could have been captured by a nimble trader, of course.

But for those with longer time perspectives, the big question is this: After the three-wave A-B-C correction, will the FTSE resume its rally?

Will sterling maintain its recovery? If so, that will put pressure on UK shares in the FTSE 100This morning, FTSE is up about 60 points and pointing higher.

But I am sure volatility will remain high as there are hugely conflicting forces at work.

Will the US succeed in reducing taxes and stripping back onerous climate-related regulations, as Trump wants? If so, enactment will be months away, at least. But sentiment towards US and UK stocks should be boosted.

Will sterling maintain its recovery? If so, that will put pressure on UK shares in the FTSE 100 and others that have dollar earnings. But if sterling falls back, as I see likely, UK shares will benefit.

Will deep divisions in the West become wider, with NATO under threat?

As ever, there are conflicting sentiment patterns at work.

Standard Chartered hits my 700p target

I last covered Standard Chartered on 19 September and this was the chart then:

I noted the large wedge and had the roughly 700p area as my target to finish off wave C. A hard break below the lower wedge line would then spell curtains for STAN.

This is the daily chart updated:

In October, the market surged above the upper wedge line and promptly reversed, as if it had second thoughts! I call this action an "overshoot", and it usually heralds a hard decline (as punishment?) - and so it transpired, with a hard break of the lower wedge line last week.

With bond yields rocketing and market prices falling, any advance will meet a very stiff windBut note that my target at 700p was reached and that was right at the Fibonacci 78% line of resistance.

Now, the pink shelf of support at the 600p area is key. If that gives way soon, further losses are in store. More likely is a bounce to the underside of the lower wedge line in a "kiss" and then the decline should resume.

In any case, with sovereign and corporate bond yields rocketing (and market prices falling), any advance will surely encounter a very stiff wind. Banks hold a large inventory of bonds whose values are plunging.

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