UK market timing

UK Market Timing

Wednesday 2 April 2008

8.00am GMT

FTSE short term forecast: Up

First a decline to 5750, then a rally to 6000

Buying area: 5780 or lower

Stop loss: 5630

Model portfolio exposure: 50% (net long)

BTI: Down

34-day BTI: Negative

13-day BTI: Neutral

BTI: The BTI turned down on 29 February and is still declining. But investors were in bullish mood yesterday and the banking sector attracted buyers. Investors believe that the worst is over, banks will recover and the recession in the US will be mild. They might be right but I have seen many of these relief rallies in the past, there is no certainty that the worst is over, in fact the odds are that once the current rally ends another wave of selling will carry prices to new lows. The BTI may turn up to reflect the current bullish mood but the 34-day BTI is still negative, indicating a bear market.

Elliott wave count: Yesterday's break above 5850 changes the pattern. Instead of the rising wedge discussed in yesterday's update, the rally from 17 March is more likely to be a larger upward correction, probably a double zigzag [a,b,c,x,a,b,c]. As you can see on the chart I have amended the wave count to reflect this latest move. The overall pattern since the low in January may be a symmetrical triangle [(a),(b),(c),(d),(e)]. We are currently in wave (c) which is taking the shape of an upward double zigzag. Clearly, positive sentiment should drive prices higher in the short term, but not in a straight line. The Top 20 Differential is overbought so I suspect that, before the rally can continue, we will see a pull back to 5750 [wave b]. Thereafter prices should rally to 6000. The Dow Jones is breaking up, here too there is an alternate wave count (see chart). Like the FTSE, the Dow Jones is tracing out an upward double zigzag. First a decline to 12500, then a rally to 12950.

What is the BTI (Bullish Trend Indicator)?

The BTI is a sentiment indicator used to assess the mood of investors. When the daily change in the BTI is down sentiment is bearish. When the daily change in the BTI is up sentiment is bullish. The BTI is used to assess the near term direction of the market and confirms the Elliott wave count.

The 34-day BTI is used to assess the main FTSE trend. When the 34-day BTI is positive we are in a bull market, when the 34-day BTI is negative we are in a bear market.

The 13-day BTI is used to identify intermediate FTSE tops/bottoms. When the 13-day BTI is overbought the FTSE is near a top. When the 13-day BTI is oversold the FTSE is near a bottom.

Bullish influence	Bearish influence
Wave count
US markets	34-day BTI
	BTI
	Top 20 Differential

Top 20 Differential

Epic	Name	Sector	Trend	Wave	Differential	Status
AAL	Anglo American	Mining	N	up	5.0%	Trending
AZN	Astrazeneca	Pharmaceuticals	down	up	6.8%	Overbought
BARC	Barclays	Banks	down	up	14.0%	Overbought
BG.	BG Group	Oil & Gas	up	up	3.7%	Trending
BLT	BHP Billiton	Mining	N	up	3.0%	Trending
BP	BP	Oil & Gas	up	down	-7.4%	Trending
BATS	Br American Tobacco	Tobacco	up	up	4.9%	Trending
BT.A	BT Group	Telecoms	down	up	0.9%	Trending
DGE	Diageo	Beverages	up	up	-0.1%	Trending
GSK	Glaxosmithkline	Pharmaceuticals	N	up	7.6%	Overbought
HBOS	HBOS	Banks	down	up	28.8%	Overbought
HSBA	HSBC	Banks	down	up	7.5%	Overbought
LLOY	Lloyds TSB	Banks	down	up	14.5%	Overbought
RIO	Rio Tinto	Mining	up	up	2.2%	Trending
RBS	Royal Bank of Scotland	Banks	down	up	9.5%	Overbought
RDSB	Royal Dutch Shell	Oil & Gas	N	up	0.1%	Trending
STAN	Standard Chartered	Banks	up	up	12.0%	Overbought
TSCO	Tesco	Food & Drug Retailers	N	up	4.3%	Trending
ULVR	Unilever	Food Producers	up	up	7.2%	Overbought
VOD	Vodafone	Telecoms	up	down	-4.4%	Trending

		Average			6.0%

The Top 20 Differential moved up from 3.8% to 4.7%. After adjustments the Top 20 Differential stands at 6%. This is the highest level it's reached in the last three years, in fact since I developed this indicator in 2005. Normally the indicators should bounce between 3% and -3%. Anything near 3% is overbought so here the big caps are highly overbought. This has been caused by the banks like HBOS and LLOY. I expect the banks to pull back and drag the FTSE lower.

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