This wedge pattern says the FTSE is about to spasm violently

There’s something weird about the FTSE 100 right now.

In all of my years of trading, I’ve never seen a stronger example of ‘resistance‘ (where a market is unable to rise higher than a specific value) than I’m seeing in the FTSE right now.

The FTSE index looked like it would first rise above the magic 7,000 level in 1999, during the dotcom boom. That boom turned to a bust, and the market fell away. The market gradually rose again to 7,000 in 2007, only to bounce off it a few times and then fall back after the 2008 crash.

Since 2013, the FTSE has tested that 7,000 number over and over again, but it bounces back down every single time.

Just look at the chart below. The seven and a half year old line of resistance really stands out, doesn’t it?

FTSE 100 spread betting chartThis resistance at 7,000 is one part of a ‘wedge’ pattern. The other half of the wedge is the support line, which begins at the 2009 low.

As you know, the wedge is one of my favourite patterns – and this one is a doozy, lasting almost six years. Wedge patterns are important because when a market eventually breaks out of a wedge pattern, it normally breaks out in a strong, decisive way – violently up or down.

In other words, something’s got to give.

Either the FTSE will finally surge through the 7,000 level, after 15 years of trying. Or we’re in for a serious crash.

I’m using Elliott waves to pinpoint the turn

When this dam breaks, the carnage will be immense. But which direction will it go?

Time to zoom in and take a closer look.

FTSE 100 spread betting chartThis is the close up chart. Following last Tuesday’s bounce off the long-term resistance line at the top of the chart, the market has displayed a perfect five-wave Elliott-wave pattern (the waves are numbered 1-5 in red in the chart above).

This is highly significant, because a five-wave Elliott-wave pattern normally indicates that the trend is about to change.

This five-wave pattern had some signature Elliott wave characteristics: wave 3 is long and strong, and wave 4 does not go higher than the price levels of wave 1. It ticks all the boxes.

And after that low (at the red wave 5 on my chart), the Elliott-wave patterns kept on coming. The rally from the low formed a textbook Elliott-wave A-B-C pattern.

So once again, I have all the evidence I need to strongly suggest the trend has changed.

Here’s how I’m trading it

This Elliott-wave pattern first showed up on 4 February, and it has already shown me a few different trading opportunities.

My analysis has shown me the best place to make low-risk trades. But what about if I’m wrong? Well, that’s where risk management comes into play.

I always use stop-losses to limit the amount I can lose in any one trade. And I use my 3% rule to determine exactly where to place my stop-loss (my 3% rule says that you set your stop-loss in such a way that your maximum loss from each trade is equal to 3% of your total trading capital).

That way, whatever the market does from here, I am trading with the odds on my side. That is what the pros do – and over time, if my analysis is right, I’ll win more than I lose.

A final thought

Following a disappointing trade, a lot of traders give up on that market and switch to another market in disgust. They might have studied the gold market for days or even weeks, stalked their trade, spent much effort in trying to nail that perfect trade entry – and still lost money.

To some, that would be a devastating outcome. That’s an understandable response. But as a trader, it’s a terrible mistake. You should never allow your emotions to cloud your judgment in that way.

Every morning is a new day. Keep analysing your charts with the updated action, and never be afraid to change your mind.

Nimble traders are usually the most successful.