There were more top extensions in equity indices yesterday. The German ‘2nd tier’ index and Austria both extended, as did New Zealand (see later in this edition). These warnings of failing strength in Northern European indices shows that the rally is ‘running on empty’ and will stall at any moment. That time may now have arrived as the Southern European indices that are our favoured ‘short’ candidates appear to be failing here and now:
The longer-term picture also appears gloomy in the US. There has been a lot of divergence between sectors and sizes of market-cap in the last six months. The Dow made monthly-scale top extensions in the Spring which marked the beginning of a trading range in large-cap equities. More recently we have seen new monthly-scale tops in the Nasdaq, which had pushed higher in the interim. These were joined by weekly-scale signals very recently and of course we have reported daily-scale top extensions in various US indices more recently still. The scene is set for weakness but we must repeat that these markets will remain difficult to trade as the transition from bull to bear is often choppy.
The bad news continues elsewhere. Taiwan compressed and dropped, which argues that a new down trend has begun there already. New Zealand (which occasionally acts as a lead for other markets) has also made a top extension:
Commodities are already weak. The Soy meal market that we had advised buying (on an upward break of a compression) has now reversed back down through that same compression. This down break was the cue to exit the trade but it seems likely that the whole Soya complex will still try to rally, as the bottom extensions that we saw and reported in Soya oil are still current. We will try to find a place to re-enter longs:
The commodity index that we follow has finally broken compressions, downwards. This has not been very useful as the repeated re-compressions meant that we could not be sure that a true break had occurred on each sharp move within the range. Now that a clear break has occurred, the drop has already been large enough that we must be careful of bear-market rallies. There is some reason to think that this might begin in natural gas, which has made a bottom extension. Buy some here.
Other energy contracts have continued to fall, with one rally that failed to make it back up to the level of a compression in crude oil. The rally did bounced back exactly to the level of the equivalent compression in heating oil however and you should now be short, either from the initial report of the break in the edition of 24th October, or from the rally that peaked in Heating oil on the last day of October - this was a typical 'return movement' after a compression as described in our user guide:
More soon on currencies and bonds.