- New Science in old markets -

Stocks drop but start to extend, Bunds and Nat Gas tops

The sudden weakness in Stock markets in the last few days has been attributed to a worsening situation in Argentina which has spread contagion to other ‘emerging’ markets.  R N Elliott (of Elliott wave fame) remarked: “At best, news is the tardy recognition of forces that have already been at work for some time...”

Nothing could be truer of this situation. Argentina has been mismanaged since the 1930s when it was still a first world country so any further lurch downward in its fortunes can hardly be a surprise. More likely the human need for explanations requires some evident trigger for this equity market drop and Argentina was in the news at about the right time. As a cause however? Not likely.

The stage has been set for stock market declines for some time and we have warned of the occurrence of weekly and monthly-scale top extensions in many different national indices in various parts of the world. Here is an updated selection.

The US has been making monthly-scale top extensions for several months:

So have a few of the Europeans – Germany has been the best performer in Europe over five years and it has made these signals. Italy and Spain (not shown) have rallied back up to the level of older compressions where we expect resistance:

There have also been weekly-scale top extension signals in Northern European indices. These economies and their markets have particularly benefitted from the influx of cash due to being locked into the Euro on favourable terms, so these extensions are particularly sinister:

There have also been some bearish signals in the East, from Singapore and China, where declines had already begun and where compressions formed and broke down:

The recent spate of bear signals also contained some daily-scale versions, in the US, where top extensions formed in the Dow just before New Year and then compressions formed and broke down in several indices last week. Japan did the same:

It’s not all one-way traffic – there have now been bottom extensions in Hong Kong, Singapore and Malaysia overnight and there was one solitary US sector index on Friday - in insurance:

There are no bottom extensions yet in the main US or European indices but these Asian signals are a warning that this current drop can end at any moment. This is typical of bear markets of course - there are lurching drops that can last a few days followed by longer periods in which prices recover some of their losses. Take some cover on shorts - possibly take partial profits or write some puts.

Elsewhere there were top extensions in the bund contract on Friday and also in Natural Gas:

If you bought the slight dips in Bunds earlier in the week based on our recommendation to do so in the 20th January newsletter, sell now and reverse into shorts. If you like plenty of excitement, sell Nat Gas short too!

More soon,

RE