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FTSE 100 (UKX)
At the start of the year, I discussed the Elliott wave model as applied to the FTSE 100. I used the eSignal GET automated count, which seemed to be according with the theory and heralding weakness into 2008. How right it has proved. Updating the weekly chart for what has transpired, the model suggests that, at least on the weekly timeframe, the UK market has completed a simple ABC correction (C being the move down to 5,338.7). So in respect of that count it has to be assumed we are starting out on a new long-term upmove, though within this context we might expect to see a correction back close to the C low.
However, look at the daily chart and things appear a little different. This suggests that the index is in a five-wave downmove and has likely completed the corrective upward wave four with wave five predicted to achieve a move down to 4,875 at least, with the bearish projection being a test of 4,140. Just eye-balling the chart shows that while the sharp selloff in January made the triangle breakout target almost exactly by testing 5,338.7, the subsequent recent recovery has simply achieved an expected test of the old top neckline zone and the inability of the index to climb above this level confirms its underlying weakness. On balance, the bears have not been set to flight just yet, despite ‘conventional’ wisdom trumpeting the cheapness of the market, which will always ‘sail down a river of hope’.
S&P 500 ($SPX)
Turning to the US markets and for a change looking at the picture of the broader S&P 500 index, the weekly Elliott count from eSignal is no less bearish.
After an extended fifth wave that clearly topped out at 1,576 in mid-October, the selloff in the US has seen the index drop to 1,270 and a close test of both the 61.8% retracement of the preceding fifth wave upmove and the nearby 38.2% retracement of the 2003-2007 grand bull move.
Coincidence of this nature is important. Theory suggests this level is the last likely support point for a rally, with its failure indicating a complete retracement back tothe start of wave five (1,060.7) and a likely close test of the 61.8% retracement of the 2003-2007 bull move, which stands at 1,080. Indeed, on the daily chart, the GET model in eSignal favours further weakness toward a level somewhere between 1,040 and 812.
These are aggressive calls pointing to further losses of some 20%. Perhaps a more conservative expectation would be for a move back down toward a test 1,270, which will be key to any subsequent recovery. Should this level fail, look for weakness to initially target the June 2006 low at 1,219.3, also the low of an area on the chart that generated significant congestion in 2006
and 2005.