Chart of the week: Did FTSE 100 peak last week?

With the bullish picture changing very rapidly, our chartist sets a new target for the blue-chip index.

With the tumultuous and volatile market action in the share markets last week, I thought I would update my outlook for the FTSE 100 index at this opportune time.  

I have noted that for the past five times, market highs have coincided with the date of the equinox to within a decent tolerance. Although the FTSE and the US indexes contain vastly different companies, they do tend to trade more or less together since they are driven by the same force – sentiment.

I have been tracking the Dow closely this month, and this is the chart I compiled a few weeks ago marking the equinox dates in March and September each year:

Source: interactive investor    Past performance is not a guide to future performance

And guess what? Isn't it remarkable that market highs lie on or close to the equinoxes?  And bingo! - another accurate hit was made last week with the Dow making a high at 4pm last Tuesday – one day before the Vernal Equinox (as of Friday's close, the Dow is off 500 points).

With this evidence, we must conclude that some changes are afoot at these times of the year. So why should markets turn at the equinox?  That's a good question!  But they do.

How does this relate to the FTSE performance?  Let me back up and analyse the long-term weekly chart:

Source: interactive investor    Past performance is not a guide to future performance

From the 2016 low (wave 4), the market rallied in the final wave 5 in five smaller waves – and crucially inside the trading channel described by my blue tramlines.  That wave 5 of 5 high was made in May at the 7,900 level, and it has been downhill since then – bar the post-Christmas rally.

Note that the lower tramline break was made in October, then fell to a low below 6,600 at Christmas and then staged the counter-trend bounce to the 7,370 high on Thursday – and that level is a precise Fibonacci 62% retrace of the entire move off the all-time high (ATH). And that is the level where most counter-trend moves fizzle out.

Here is the daily chart of recent action:

Source: interactive investor    Past performance is not a guide to future performance

This is a very interesting chart! I have my long-term blue tramlines, the medium-term pink tramlines and a short-term yellow wedge (in the classic five wave form).  

And Friday's heavy selling brought the market to the lower wedge line after planting a kiss on Thursday. The formerly bullish picture is changing very rapidly before our eyes!

With the rally high and kiss set on Thursday (one day after the Vernal Equinox), is the FTSE also displaying the 'Equinox Effect'?

Note the weakening momentum at each high all the way up the post-Christmas rally - a sure sign of a counter-trend bounce and a reliable forerunner of a sharp correction - in this case down - that may have started on Friday.

This is not a bullish scenario. In fact, it has the potential to see the FTSE rapidly descend to the wave 1 low at 6,600 – and beyond - in a large third wave.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.