Dow futures made a bottom extension last night, as did Comex copper. We have seen some sector bottom extensions in the last few days – insurance first and now oil and gas and now this major market index, so it is time to take profits on shorts. Cover all US and European equity index shorts at market and explore the long side for a 'trade'. As we remarked yesterday, it is most likely that weakness will resume in equities as recent weekly and monthly-scale tops will inhibit rallies for many months to come. Bear market rallies can be sharp however and we will try to identify them, as usual. This 'trade' should only be attempted if you have a time horizon of three weeks or less.
It is a bit of a guess which instruments to choose, but we suggest the S&P in the US and Germany in Europe, for reasons often written here about the effects of the Euro. If you still have any remaining copper shorts from our recommendation in the December 27th edition, cover those too and try a long position – this fits our commodity view in yesterday’s edition that rallies were likely. Gold did not break up by the way, so there is nothing to do there - yet.
At the same time US treasury bonds made a top extension, as did Bunds (again). We have already advised reversing from a long bund position into shorts at the first top extension six day ago and we would now advise selling US bonds short too. This bond short position might last longer than three weeks as the longer-term picture is cloudy.
We will advise more soon,