The FTSE 100 has fallen to a significant low – what next?

With the nuclear power station disaster unfolding in Japan as I write, stock markets around the world are selling off.

In previous blogs, I have used Elliott wave theory to suggest that the 6,100 high made in February in the FTSE 100 was the final fifth wave of a five-wave sequence.

Having put in that fifth wave, I then said that the most likely direction was then down.

This is the daily chart:

FTSE 100 graph

(Click on the chart for a larger version)

The five waves up are clear.

I drew my central tramline connecting waves 2 and 4, and it passed through the summer 4,800 low, making a third solid touch point.

I then drew my upper tramline through many of the highs. Although not perfect, I believe it is the ‘best fit’.

Note that the spike high in November pushed up above the line in an ‘overshoot’. I find these occur quite frequently in strong wave threes.

Another feature is that after an overshoot, the market frequently falls quickly right back to the lower tramline, as it has done here.

How far might the FTSE fall?

My lower tramline was broken decisively in early March and fell rapidly.

Here’s the interesting bit. From my lower tramline, I then drew an even lower tramline which was both parallel to and equidistant from the other tramline.

And where did this morning’s plunge stop? Right at my new lower tramline.

Here is the chart in close-up:

FTSE 100 graph

(Click on the chart for a larger version)

The market is extremely nervous as I write, and it could plunge even further from here. But at least we have a bounce from my tramline target.

If my Elliott wave labelling up is correct in five waves, we have a change in trend and my waves 1 and 2 appear clear to me. If so, we are in a wave 3 down.

Using Elliott wave theory gives me an insight into where the market is positioned in the various waves and whether I can expect an up-move or a down-move, and in what time-frame.

The example of the FTSE as I describe here is an almost text-book case in point. And using my tramline projections in conjunction can give me solid targets to either take profits, or look to add to positions.

See me in action at the London Traders Expo

I’m going to be appearing at the London Traders Expo at the Queen Elizabeth II Conference Centre in London on 8-9 April. The exhibition gives you the chance to meet traders, industry experts and try out new software packages – as well as picking up ideas and strategies. I’m going to be talking specifically about using my Tramline Trading methods to identify low-risk, high probability trades. You can register for the exhibition for free here.