The recent sell-off in stocks that started in Japan a week ago has now produced the first bottom extension signals, in Belgium and Finland:
These are both 'minor' indices of course but we have often seen early warning from such sources, especially from Belgium, when a change is due. This probably means that the period of 'reaction against the trend' is ending and that either the general upmove in stocks will soon resume or that a range will form. US equity indices are already in such a range so this is the slightly preferred outcome. Either way it means that you should not 'press' on the short side any more and only sell again after rallies. In fact it seems sensible to trade both side of the market now - buying dips and selling rallies.
This has two obvious other corollaries, because of the correlations between movements in stocks and other assets:
- Gold has threatened to break up from compressions, as reported in the second November 8th edition. It has instead traded in a range (see below) and this compression is now just as likely to break down as up. Wait.
- Bonds look vulnerable. The Italian government bond (BTP) futures contract made a top extension, as reported in the first November 8th edition and this caught the top of the rally in that and other bonds. More weakness is now likely. Here is an update:
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com