The long awaited summer stock market correction finally kicked into gear this week. The FTSE fell sharply by its largest one day fall in some five years to 6250. Before I get to the current technical picture, the writing for the sell off has been on the walls ever since the warnings flashed to financial markets during the China initiated February 2007 sell offs.

There are many fundamental reasons for the sell off, as there always is in these cases. Many where highlighted in past articles over the last 5 months, so without repeating the usual suspects in depth such as the unraveling of the Yen carry trade, and UK inflation led interest rate hikes to 5.75%. I would just mention the most recent suspect, being assumed as the triggering influence to the current sell off in the stock markets around the globe. Which is the recent failure of the Bear Stearns Subprime mortgage debt ridden hedge funds, and the likely further fallout in the financial and banking sectors, which despite making record profits are expected to make significant provisions in the future for bad debts and similar failures in the mortgage and derivatives sectors. Enough of what is, and will be written about by many more authors in the coming weeks.

Technical Analysis of the FTSE 100 Index

My last analysis on the FTSE attempted to fix a market peak to occur sometime during May 07, however at the time there was no sign of an imminent peak given the technical picture, and instead the FTSE 100 has marched on for a further 2 more months delivering a new high for the year at 6754 just over a week ago!

1. Trend Analysis - The uptrend against expectations of correction during much of the summer, remained in an uptrend right up until this week. The minor initial trigger of a potential decline occurred on break of 6575. The stock market sell off gathered momentum and by Wednesday 25th gave the key secondary trigger occurred on the break of the two preceding lows - 6496 and 6451 as well as break of 6450 prev high. This immediately targeted a trend to the Key support trendline at 6300 and key support level of 6255. Which by today's close have both been breached. The next targeting level for the FTSE 100 Index is the ultimate target and major support level of 6000. Which is where the FTSE is expected to trend towards. However, I still view this as a summer stock market correction, and therefore am expecting 6000 to hold and a low to come in above 6000. If 6000 fails, well then I will have to dust down my FTSE charts to see what happens in that eventuality.

2. Time Analysis - The Sell off despite being pretty severe in price terms, has a lot of time on its hand to develop further, original analysis suggested a decline in the order of 2 months, which would take us into early September from the peak. Which suggests the pattern to develop may resemble a double bottom with a probable lower second bottom.

3. Elliott Wave Analysis - I have left the wave counts off the charts, because I fail to see any meaningful count in the current FTSE chart. Elliott wave sometimes works, sometime it doesn't, if you have to resort to complicated double zig zag's and complicated interpretations to try and get elliott waves to fit a chart, then that basically means that you should forget elliott waves on that particular market for the time being. Off course a correction should follow the basic simple pattern of an ABC, which confirms the slightly lower second bottom scenerio as alluded to above.

4. MACD Indicator - The MACD indicator is in full sell mode, and implies intra-day volatility. It also means we could see the first low pretty soon and therefore more FTSE selling in the near term on route towards 6000. After which the pattern may waste as much as 4 weeks on a counter trend rally before making the low.

Summary

The Summer FTSE 100 Index Stock Market Correction is in full swing, targeting a low above 6000 with pattern probability of a double bottom with a lower second bottom by early September. The scenerio is conditional on 6000 holding.

By Nadeem Walayat
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