- New Science in old markets -

China, grains and a note on equities and bonds

Chinese stocks rallied last week after some bullish news on output from factories and from retail sales and the rally continued into today. These are not the only bullish news items that we have seen in the last three years of declining prices and this is not the only rally in that time. This is however quite close to the moment when we have been anticipating the end of this isolated bear market. We said on the 28th November that the turns due on either Dec 12th or at the end of the year could provide the timing, expecting that we would see a bottom extension near one of those dates to provide the combination that would mean ‘buy China’. Instead, we have this unexpected rally. This probably means that this is just another ‘swerve’ in which a market that has been falling toward a turn rallies without warning and that turn then marks an interim high point instead of a low. The price decline can  continue after that. In this case, there is more evidence that Chinese stocks are indeed making a ‘swerve’ as there is an old compression just above here that will provide resistance, as shown in the first chart:

The second chart shows the even older weekly-scale compression that started the decline from June. This is now several weeks past its ‘sell-by’ date so we cannot rely on it to indicate further imminent declines. It seems likely that this market has begun a process of ‘bottoming out’ and we will look for places to buy it. In the meantime, expect the current rally to run out of steam either on or about Wednesday this week (the 12th) or at that daily compression shown in the first chart – only about 2% above current levels.

 

Grains have started to diverge one from another, which is their usual condition. We have been commenting as if they were a single market for some while, during which time that they have been in the grip of single-minded crowd behaviour and we will examine them separately now that phase appears to have passed . There are still similarities of course. Wheat first:

There is more information in the activity of the more distant wheat months than in those nearby. There is a downtrend in December 2012 delivery futures and in March 2013 but a more balanced trading range in July 2013. This range has included a couple of daily-scale compressions and these will provide nearby support. Longer-term support is quite a long way below here at will be provided by the weekly-scale compressions that are best-defined in the weekly July delivery month. This is not a bear market but still a trading range that shows no sign of breaking yet – more weekly-scale compressions will probably form soon, just before the range breaks. Trade both sides until then.

Corn is not too different. There too, weekly-scale compressions form occasionally and lead to a small move.

The most recent of these has just broken downward and rallies should be sold.

Soya has been more dramatic. The initial push up from weekly-scale compressions in soya beans was followed by a second 'leg' and the whole move then 'corrected' - meaning that prices fell almost all the way back to those weekly compressions that began the upmove.

Since then, there has been a rally that is now in resistance for several reasons and so the soy complex should be sold hereabouts. Soya meal (not shown) is the strongest member of the group and so traders should choose beans or oil to short-sell.

 

Elsewhere, US stocks are still bumping up against resistance and today is a modest (grade 3) turn day. If not short, try selling hereabouts. Italian and Spanish stocks have weakened a lot in the past few days and should continue to do so, even if Germany remains strong - this is our long-term view and these Southern European markets remain extremely vulnerable. We will see if France finally joins that group, as it obviously soon should. Bonds have dipped and should probably now be bought again – there is not too much downside risk here.

A full turn update will follow later – this is another relatively quiet month for turns.

RE