The LSE drifted sideways in the last week with the trends on VectorVest still positive for the bulls. Constrictions in volatility as in the past two weeks invariably precede a high momentum move.
Both the Primary Wave (short term trend) and the underlying trend of the VectorVest Composite UK are Up. The underlying trend has been confirmed by price action with the most long term measure of the trend on VectorVest (Confirmed call), positive since February 2016.
I note that there is a green light in the price column of the Color Guard. This shows that the price of the VectorVest Composite is higher day over day and week over week. This is an aggressive Buy signal.
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The lows of the week were defined by a trendline joining the lows since the Brexit low in June. The chart of the Composite and this trendline which has many touches is shown below. Also evident is the bearish normal divergence between the MTI and the Composite which I have fully discussed over the past two weekends. This is a leading bearish signal which joins the “butterfly” harmonic pattern. Both patterns make me wary of the future of the trend but for the moment it is still intact and I am sitting.
Once again, a bearish signal from the Composite which is preceded by such a divergence, while the MTI is in an overbought position, would lead to an increase in the probability of a move down. For the moment this is pure conjecture as the trends are intact right down to the Primary Wave.
The shares I have been holding have done well since Brexit but over the past few weeks have moved sideways with the index. Hill and Smith is a good example of this. The share remains undervalued and EPS is growing strongly. The share price has moved sideways, charting in the process a text book five wave “flag” pattern. The chart is shown below with the 5th wave of the pattern complete. The target from the pattern will be the flag pole otherwise known as the last impulsive up move added to the low of the flag. Roughly, the flagpole is 400 and added to the low that equates to a 1500 target if the support holds. The calculation is commonplace in technical analysis and is known as a measured move. I will hold the share and add to the position if and when I observe the price breaking upwards through the top trendline defining the resistance within the flag pattern. If this occurs then I would suspect that my divergence on the Composite gets blown away and the trends persist and continue.
JD Sports is similarly charting a continuation pattern although it’s not as marked and text book perfect the Hill and Smith.
The general market is 80% of the exercise. If the Composite continues upwards then all will prosper. Keep your eyes carefully peeled on the front page of VectorVest and if you have the time cast your attention over the chart of the Composite each evening. A break of the trendline defining the lows would mean a significant deterioration of the technical picture. I know I seem to have been saying that for weeks.
A futher slump in the pound dollar exchange rate cannot be ruled out amid expectations that the Bank of England will remain in easing mode in case the UK economy struggles from the so called “hard Brexit”. My first FIB target from the monthly chart,that I have been presenting for years, was 1.25. This has been reached and exceeded in some style after the Conservative party conference. The next target of 1.12 remains stubbernly in place. A fall in Sterling may be the catalyst that pushes the Composite to the resistance defined by the top trend line defining the rising wedge in the chart of the Composite above.
During the year the Ft100 which is made up of blue chip companies with large foreign operations is up 13% but down in dollar terms. The mid cap ft250 is down 14% in dollar terms.
David Paul
October 22nd 2016
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