Chart of the week: FTSE 100 hit my target – what now?
30th August 2022 10:35
by John Burford from interactive investor
UK stocks have done well this summer, but analyst John Burford believes it could be just another bear market rally. Here’s what he thinks will happen over the next month and what is needed to change his mind.
I last covered the FTSE 100 index on 13 June when it appeared to be starting a major wave lower. Although my first downside target was hit on the nail a few days later, it managed to stage one more last hurrah rally (but not to a new high) and is currently in descent once more.
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So, will this be the charm that kicks off my long-awaited bear market?
This was the chart I showed in June:
Past performance is not a guide to future performance.
My wave labels strongly suggested a rapid decline to the first tramline support around the 7,100 region from above 7,300.
So how did this outlook pan out? This is the updated daily chart:
Past performance is not a guide to future performance.
And on 17 June the index hit 7,100 on the nail. But that was it for the bears. After some choppy trading, it staged one more rally on the back of advancing energy shares, aided and abetted by a very weak sterling.
And that confirmed the action of my lower tramline – it is always potential support.
But the rally only carried to the 7,600 area on 18 August – shy of any new high. Thus, my wave 2 high at 7,690 set in February still held firm.
And that observation helps me retain my view that all rallies since the 2018 all-time high are bear market rallies. Only a strong push above that 7,900 record level would force me to go back to the drawing board.
In light of that latest rally phase, I have amended my wave labels and I am back to my original wave 3 of 3 down that started on 18 August at 7,575.
Only a push above that high set only a few days ago would change that outlook.
In terms of sentiment, that is decidedly bearish given the macro picture of high inflation, a cost-of-living crisis and looming energy bills of some size.
Such a picture can often lead to severe bear market rallies – and we may be in one right now.
If the current bounce terminates around here (latest 7,480), I expect to see a very hard down phase into September, which is usually a poor month for equities.
John Burford is a freelance contributor and not a direct employee of interactive investor.
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