- New Science in old markets -

European stocks break upward from compressions, Rbob does the opposite

Equity markets have almost all rallied in the last few sessions, pushing European indices up through those compressions reported in the 8th October edition. This has produced some follow-through strength, mostly in Europe but now the rally is already in resistance. An update on the break:

This strength has pushed Nasdaq futures up near to the recent compression, where rallies might be expected to fail – this looks like the ‘return movement’ that we describe in our userguide as a common feature of compressions. These compression signals occur just before a break into a new directional trend and have some of the characteristics of a mathematical ‘attractor’. The price often returns to the compression before continuing that new trend. This isn’t wacky mysticism but a widely observed aspect of dynamic interactive systems, including markets. It’s one reason that we know markets aren’t random. There have also been extensions in a couple of relatively minor indices – Mexico and Australia:

This doesn’t mean that we advise selling everything short here - there is probably going to be quite a bit of divergent behaviour. We have been advising readers to take long positions in Germany whenever it seems appropriate to buy anything in Europe and this upward break is another such reason. Prices have already run up quite a bit, so there could be a dip to buy – perhaps down to the compression again - but we also think that there is a high probability of a bubble growing here so any small price advantage gained by waiting a bit might be overshadowed by the large up-move that has been possible in German stocks for some time. It would be a pity to miss it. There are reasons to buy the UK too, but the index we follow most closely is the Dow GB, not the main FTSE, so please be careful that you don’t buy mining stocks with suspect governance that just happen to be listed in the UK.

There are some short-sales candidates and there will be more as the next few days go buy.  Start with Nasdaq futures, where that compression provides a useful place to put a protective stop – somewhere above the high of that day, which was 2818. Spain and Italy are also perennial candidates to sell, although we don’t yet have an immediate reason to do so - it might be better to wait a little. As shown, Australia has extended and so is also a candidate but that probably means that the commodities that are its main exports provide better sales opportunities.

There was a compression in the continuous commodity index yesterday that will provide a clue if it breaks downward and another in Rbob gasoline that has already done so. Our last advice to sell energy markets probably led to being stopped out for a small loss, so this is another chance to enter.

Grains continue to threaten another up move, that could easily develop into a bubble, so short positions don’t seem sensible there. In fact the most recent signal was quite bullish – a bottom extension in soya oil, which had previously been the weakest member of the group. If not long, consider buying some of this or a related market.  An update:

Many markets seem to have a tendency to range-trade at the moment, so be careful of whipsaw. Compression signals show that ranges will soon break of course, which is why we make these recommendations as soon as they do. Don't forget that some markets are also in a state of extreme compression, as shown in the monthly signals reported in the October 1st edition.

The crucial Dow transport index has also not yet broken from its tight weekly-scale compression. Pressure is building.

More soon,

RE