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Is a rallying FTSE the end of the bear market or the perfect time to sell again?

by Simon Griffin

FTSE 100 (UKX)

Last week saw the bellwether UK index creep above 6,000 and up to a test of key resistance on the daily close chart. This resistance, situated close to 6,090, came from the return line of the bear channel that now defines the broad down trend of the market and which has been influencing since last October.

Also influencing has been the ‘neckline’ of the double top pattern that the market worked through during most of last year. Most importantly, when we turn to the Elliott wave count as provided by the AGET feature of eSignal, a method that gave us excellent guidance at the turn of the year, we see that it suggests we are now in the corrective fourth wave in a five wave decline.

The Fibonacci 61.8% retracement of the move from the peak of wave two to the trough of wave three again comes into play at 6,085, so there is much to suggest that the market will struggle to get much above levels seen at the end of last week but that if it should then we have a major change of overall sentiment. For bears, the wave count model is pointing to further declines that will take the index below 4,886 in due course. So current levels will either signal the end of the bear market (realistically we should await a move above 6,215 to be sure) or will prove to have been a great time to resume selling once again, only time will tell for certain though I favour the latter (with a tight protective stop of course).

This Week’s Hot Chart

Marks & Spencer (MKS)

BUY - 361p

TARGET - 463p

STOP LOSS - 348p

Spare a thought for poor Sir Stuart Rose, having taken the helm of Britain’s quintessential clothing retailer back in 2004 and seeing off a takeover approach by Sir Philip Green, he is now witness to the shares plummeting back to levels that were prevailing three years ago.

In the interim the shares were a spectacular success rising by almost 120% in the two years to May last year as Rose’s rescue plan gathered momentum. Macro-economic influences have put pay to the magic and in the last 12 months the shares have lost some 52% of their value. This was one of our better calls in 2007 when in late June we suggested selling at 650p. As the chart shows a large head and shoulders pattern completed in mid-December with the move below 564p and targeted a 196p down move to 368p.

In the event the market has dropped through the bull channel base line and

tested 352p and returned to test support from the congestion that previously resisted during much of 2004 and 2005 post the Green bid. Given the likely strength of this support and the persistence of bullish momentum it seems reasonable to suggest a recovery in the share price could be overdue.

Technical talking point:

Watch out for bull and bear traps

Because different groups can legitimately have different expectations, the market rarely, if ever, moves within a trend in an orderly fashion. An up move, for example, is made up of a series of advances and corrections but crucially the gains outweigh the corrections on a net basis. From a trader interaction perspective, the extent to which a trend develops and perpetuates is beholden on an imbalance in two groups that are colloquially referred to as the bulls and the bears. More bulls than bears and the trend is positive, more bears than bulls then its downward. However, and here is the rub, quite often at a hiatus in a trend or soon after to a turning point in a market that imbalance can temporarily flip. What transpires is a false move, a counter-trend excursion that can wrong foot the most seasoned market watcher.

In an upward trend we see the trend break down and can be fooled into thinking that the market has turned bearish, only to see the up trend re-establish and have to scramble to close off shorts and get back into a market that seems to have renewed vigour, not least because others have also been caught out in similar fashion. This is a classic bear trap and might appear on the chart as a bull flag or pennant or a return to test trend line or channel support for example. In order to prevent succumbing to these moves it is important to keep a sense of perspective and to use such measures as trend lines, trailing stops or moving averages to hammer home where a true trend change might realistically occur. This is what is meant by a bull trap and they occur regularly in down trends as our sample chart shows. Bull traps are frequent interludes in a bear market and can be fast and vicious events. We have seen two in the current sell off and it just might be what we’re witnessing one in the UK right now.