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FTSE 100 May Correct Before Rally: Technical Analysis

U.K. stocks may drop by as much as 13 percent before resuming a rally that could push the benchmark FTSE 100 Index above the highs of 2007, Richard Bayley, a technical analyst at Collins Stewart Plc in London, said.

The gauge, which has gained 5.5 percent so far in 2012, is showing signs of entering the last of a three-wave corrective phase in an Elliott Wave pattern, Bayley said. If that happens, it will be followed by a rally that forms part three of another, broader five-wave formation, he added.

“The bounce from here is stage three of an Elliott Wave cycle, often the biggest part of the wave, pushing us ultimately past the 2011 market highs and probably past the 2007 levels of the index as well,” Bayley said.

The FTSE 100 reached a high of 6,732.40 on June 15, 2007, from where it plunged to a low of 3,512.09 on March 3, 2009. The gauge lost less than 0.1 percent to 5,883.8 at 2:51 p.m. in London today.

The Elliott Wave is based on a theory developed by the accountant Ralph Nelson Elliott during the Great Depression and says that prices move in a pattern of five impulsive wave followed by three corrective waves. In a five-wave move, waves number two and four are corrective.

Moving Average

The signal for a correction will come from the weekly chart of FTSE 100’s moving average convergence/divergence line, Bayley said. If the MACD line -- the difference between the 12-day and 26-day exponential moving averages of the index -- crosses below the 9-day signal line, a sell indication would result.

“We’re expecting another sell signal to come back in soon and that will tell us the markets are going down and that’s the final fall in markets before the resumption of the big bull market that has been present since the March lows of 2009,” Bayley said.

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

Bayley had predicted in September that U.K. stocks may drop by as much as 15 percent before resuming a rally that could push the FTSE 100 to the highest level since the end of the dot-com bubble in 2000. The FTSE 100 has gained 15 percent from the end of September.

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