- New Science in old markets -

Equities

The picture has been mixed in equities. We last wrote in the November 25th edition that US and European equity markets would see "a period of sideways price activity or an imminent dip and that the most likely outlook was for some churning followed by renewed strength". We have seen both kinds of behaviour and now there have been bottom extensions in a few of the weakest markets - those that are most closely affected by the falling oil price:

Mexico and Norway

These bottom extension signals are not in major markets but they do argue that the selling pressure is 'overdone' - probably in all the equity markets that have seen liquidation in the last few weeks. That means that we should look to buy some of them - probably those that have fallen least. This includes  several European markets and most of the US too.  In fact there was a compression signal in the Nasdaq 100 index yesterday, which means that US equities may be bought if it breaks upward any time in the next few days:

Nasdaq ext and comp

You may even want to establish a small US long position hereabouts in anticipation of an eventual upward break, keeping more buying in reserve pending  an upward 'push' if it happens. We don't usually recommend 'guessing' which way these knife-edge compressions will break, but the bottom extensions shown in the first charts are a strong clue that markets may be 'sold out'. Additional candidates to buy in Europe are Germany (as usual) but also Spain as it is re-testing a compression, where we expect it to find support. This offers the chance to buy with a close stop:

Dax and Spain

We have been suggesting for a while that the long-lived bull run in equities might end with a steepening uptrend into a 'blow-off' final ascent. For some reason we had not anticipated that this would happen in China and were in fact caught short when it started its recent 30% rally. This was a mistake for which we apologise but it does illustrate how quickly markets may rise even after they have already made substantial gains. This may still happen in the others too, particularly in those economies that will benefit from lower oil prices, such as Germany. France will not gain much as it has a large nuclear sector and the UK will suffer as much as it benefits, so Spain seems a good candidate from this point of view too. Buy Germany and Spain. A chart of our blunder:

China short and stopped