Chart of the week: A breakout opportunity for FTSE 100

FTSE resumes uptrend

Sometimes, best efforts are not quite good enough - and that applies in spades in to field of technical analysis of price charts. At every second of the day, we are using the evidence presented to us in real time, and attempting to come up with a best guess for the most likely path the market could follow in the immediate future.

A good analyst looks upon his/her forecasts as an exercise in probabilities. Some outcomes are more likely than others. One of the great advantages of using the Elliott wave model is that very often, we are offered a choice of only two main options.

When set against the 'fingers crossed' trading method, that is a considerable bonus.

Not only that, but it can offer a definite price level where one option is proven to have failed. That gives you a place to set stop losses in a wholly scientific way. There are no ifs and buts about it. Again, this is a considerable advantage over most other methods.

Note, I am focusing on how to limit possible losses here, which is the backbone of all reliable systems. You must know how to limit losses on your losers to prevent a black hole from developing in your trading account. You may have a few winners in your account, but it only takes one un-disciplined un-protected losing trade to wipe out much of your account.

Last week, I had this as my best guess on the FTSE 100 short term 4-hour chart

My tramline placements were my best guess and I was looking for a rally off the lower line in wave 5 off wave 4, which was a satisfactory three down (always corrective to the main trend). Odds were good the rally would continue - and to go long was the percentage play.

But it was not to be, and with sterling surging early last week, that put pressure on the perceived earnings of the international FTSE component companies. Many of these companies receive revenue in dollars, which was weakening.

Chart of the week: Predict what FTSE 100 will do next using these clues

Although my forecast was incorrect, I noted the level at which I would be wrong. This is what I wrote last week:

But a move down below the 7,680 level near-term would at least delay the above scenario. But today, odds favour my bullish scenario.

The 7,680 level was the clear stop-loss on any long trade - and that was hit on Wednesday for a small loss.

But with a new low in the 7,600 area, I then looked for a new pair of tramlines that would comply with my rules - and here they are:

The upper one was a better fit on the various highs and a parallel tramline drawn through the wave 2 low took it perfectly to last week's low. That low was likely to hold, and new long trades could be placed with confidence.

Now, I had a larger three down off the wave 3 high for wave 4 and odds then favoured a resumption of the uptrend, which is now in progress as wave 5 up starts.

As I stated, the uptrend was delayed by one more leg down, but now the picture is even clearer than it was a week ago.

I am looking for a new high in wave 5. The key is to break above the minor pink trendline and a push above the b wave high at the 7,750 level. And if sterling comes off the boil this week, as seems likely, FTSE stocks would surely get a big boost.

Of course, a break down below the 7,600 level would put a severe spanner in the works. But so far, odds favour the bullish scenario.

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