Sept. 26 (Bloomberg) -- U.K. stocks may drop up to 15 percent before resuming a rally that could push the FTSE 100 Index to the highest level since the end of the dot-com bubble in 2000, according to Collins Stewart Plc.
The advance from May 2009 until August 2011 was the end of the first five-stage climb in equities suggested by Elliott Wave theory, Richard Bayley, a technical analyst at Collins Stewart in London, wrote in a report to clients today. We are currently in the middle of a three-step decline, which will be followed by another five-part gain, he wrote.
“You probably won’t even begin to believe me until it’s half over, but the rally from May 2009 until August 2011 was the start of the biggest bull market since the dot-com bubble,” Bayley wrote. “We will have a fall before fully recovering to go on to new highs.”
The start of the first five-part stage of the Elliot Wave move higher was marked by a long-term buy signal in the moving average convergence/divergence, or MACD, indicator in May 2009, according to the analyst. The MACD sell signal in August 2011 marked the end of the series.
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 steps followed by three steps. It contends that trends don’t move in straight lines and that they are prone to setbacks. In a five-wave move, waves number two and four are corrective.
“We are currently part way through the corrective phase,” Bayley wrote in the report. “This implies a 15 percent fall, taking the FTSE 100 to circa 4,400.”
The benchmark FTSE 100 dropped 5.6 percent last week to 5,066.81 and has slumped 13 percent since the Aug. 1 amid concern global economic growth is slowing and Europe’s debt crisis is spreading. The gauge slipped 0.5 percent to 5,043.3 at 3:18 p.m. in London today.
Collins Stewart calculates its MACD indicator using the difference between an index’s 12-month and 26-month moving averages and plots the data as a line graph to identify trends. A nine-month moving average of this line is also plotted, and when they converge it implies a reversal in the market trend.
In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.
--Editors: Andrew Rummer, Srinivasan Sivabalan
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