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Since the March low, markets have seen a very nice bounce in the major indices; however, that’s all it was, a bear market rally where the down trend remains intact.

The S&P 500 is still one of the world’s most watched indices – what happens in the S&P 500 often dictates the direction of the FTSE 100, the German DAX and the Far East markets. The S&P 500 is also the benchmark that most funds are compared against. I like to look at a monthly chart of the S&P 500, giving a long-term perspective.

By adding a 20-month EMA (exponential moving average) we can gauge if the bulls or bears are in control. As you can see, we broke below the EMA back in January, then we had a move back up to the 1,400 level. While it is possible that this index will climb a little more and we could have a few more weeks of a rally or sideways action, this is a time-bomb ready to explode.

All my work now shows we are ready for the next down leg, with the FTSE 250 and the S&P 500 looking extremely weak. The last time we saw this pattern was 2001, and odds are in favour of another large down move.

Back to the future
Have a look back at 2001 when the same happened. For me, everything points to another leg down between now and the end of September, which could take us to the 1,260 level. This could be a summer when most investors may wish to sell up and go away. For short trades this should be a glorious time. You can go short on the FTSE 250 for September via a spread betting company or you can look at buying Put covered warrants or a listed CFD.

While I also think the FTSE 100 will be weak over the same period, you will get more bang for your buck shorting the FTSE 250, which has been in a range between 10,600 and 9,400. However, this pause is going to end and the next break is down.

How low can we go? From the current 10,000 level, I can easily see a break down to 8,500. Of course nothing falls in a straight line and you should expect a few sharp up days, but don’t be shaken out. Covered warrants could be a good way to trade, as you don’t have to worry about stops. Take a look at SQ30, which is a 10,000 FTSE 250 Put for December 2008.

Warning: bears ahead
The reason I am so bearish on the FTSE 250 is that many of its constituent companies are very focused on the UK economy and don’t have the international exposure many FTSE 100 shares have. The FTSE 250 gives you a much truer barometer of what’s going on in the UK. Shares listed in the FTSE 250 include Barratt Developments, Rightmove, Bellway, Bradford & Bingley and Berkeley Group, all of which are giving screaming sell signals.

Of course, we do have a few FTSE 250 companies showing strength, one being Ferroexpo. However, this company should be moving to the blue-chip benchmark soon, and on the whole the FTSE 250 mid-cap index has little going for it.

At some stage, when valuations are so beaten up, this will become a buy and you should also expect M&A activity to pick up in the FTSE 250, but that’s a way off yet. The only bullish point for the FTSE 250 is if crude oil prices can get back to below $100, which would be a positive and would certainly assist easyJet and Ryanair. It would also help some of the indices’ companies that rely on consumer spending.

The index that looks the strongest is the Nasdaq 100. US technology shares are holding up very well; however, if we do get a large summer sell-off, tech shares will find it hard to carry on moving up, so I would not say it’s a safe haven.

Vince Stanzione has produced a home-study course to teach private investors how to benefit from trading financial spread bets and fixed odds, priced at £347. For more details, visit www.fintrader.net or call 01189 476630.

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