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Equity turn update, top extension in the Russell 1000 so sell short

Today is the last day of the 3-day turn cluster that we have been expecting in equity markets around the world. The main components of the turn are from US and European indices but there are some contributions from Asia too. As ever when there is a turn, we try to determine whether it will mark a high or a low point by examining the prior trend – uptrends lead to high points and downtrends lead to lows. As we often mention, there is always a danger of a ‘swerve’ in which the market seems to be heading for say, a high point but then dips for a day or two and the expected turn becomes a low instead. These are rare but we usually point out the danger as they can be disconcerting and occur most often in strong trends

This turn spans the three days from Tuesday 16th July to today, Thursday the 18th and we had a slight expectation that it would come on the middle day, yesterday, as that was the one with the most turns.  There was a dip in Europe and the US into a low point yesterday, which rings an alarm bell but there is one more piece of evidence – there was a solitary top extension in a US index a few days ago; the Russell 1000:

This means that we have a top extension occurring quite near to a turn and this combination is always enough to make us recommend short-sales, so we do so here and now in US indices. These moments are usually a good time to short-sell our preferred candidates in Europe too, which are still Spain, Italy and France. As written in today’s earlier edition about the longer-term prospects for Europe, the easier short-side profits are probably to be found in Spain and Italy, both of which rose quite sharply today. As there is that slight remaining danger that markets made a ‘swerve’ into a low point yesterday, watch carefully for the next day and a half into the end of the week – a high point made today should result in weakness very soon and this will be a good early test of this recommendation.

More soon,

RE