Weekly Index Analysis
According to former Governor Lord King, the Bank of England has made “serious mistakes” in the fight against inflation and risks an extended period of painful price increases if it fails to act immediately. In response to the Covid pandemic, Threadneedle Street officials went on a money printing spree, the crossbench peer claimed. “It is really very strange,” he added, to think that the current interest rate of 1%, very low by historical standards, will have any significant impact on inflation running at 9%. The current governor, Andrew Bailey, is under increasing political pressure for failing to prevent the crisis and Prime Minister Johnson was also under pressure during the PMQ’s today, after the highest UK CPI reading ever recorded, was revealed today.
The Bank of America (BofA) published their Global Fund Manager Survey which is widely followed by large market participants. The May survey is extremely bearish as Global Fund Managers are currently holding the highest cash levels since 9/11. They are very “short” tech, in fact, they are the most bearish on innovation and tech since August 2006. The BofA Bull & Bear Indicator is at 2.0, which for those that follow it, is a contrarian buy level. Investors are just missing the inevitable “full capitulation” price action to buy into. Investors expect rate hikes, not cuts and during a bear market, stocks are prone to rally but the survey participants do not think ultimate lows have been reached yet.
The FTSE 100 gained yesterday amid hopes that China would ease its Covid. Also yesterday the pound rose more than 1%, which made British blue-chip stocks lag their continental peers. The price action today has removed the high from yesterday and closed lower than yesterday’s low, making a potential daily bearish reversal pattern.
The larger timeframe chart pattern is an expanding wedge, which is a corrective pattern. This pattern in my opinion breaks to the upside as the next impulsive wave plays out. What I don’t foresee is the catalyst to make the market turn. We may just need to be patient and wait for a higher swing high and higher swing low market structure to form.
Most of the decline of the global indices was attributed to yesterday’s remarks made by Federal Reserve Chair Jerome Powell, in which he said the US central bank would keep raising interest rates until there is “clear and convincing” evidence that inflation is in retreat. During a Wall Street Journal event, the Fed Chair repeatedly emphasized the need to curb the hottest inflation in decades. “There could be some pain involved to restoring price stability, but we think we can maintain a strong labour market,” Powell said.
Using a trend following strategy, we would have been in a long position from the open this week, as Fridays close signalled a buying opportunity. The Stop Loss would be below the recent swing low around 7150. If we were to break that swing low, I would ultimately be looking for a move back below the 6800 and March 2022 lows.
Currently the 7320 level is my focus point for anticipating a bullish reversal as that would be a confluence of a potential 4th wave decline which found support at the wave 1 apex. The 50% retracement level and also show that buyers were hanging around and possibly front running the 7300-bug figure level.