- New Science in old markets -

After the fall – many Equity market bottom extensions. Buy for the bounce

The latest Trump Twitter policy announcement caused a spasm in world markets and the ensuing sharp drop in stock and commodity prices has now led to bottom extensions. These are too many to show, so here are a sample, starting with the 'important 4' US indices:

US stock indices bott exts

The bottom left chart of the group above shows that the Nasdaq fell from a compression. As we have often pointed out, once a compression has formed, they usually act as 'attractors' that alternately repel and attract the price, as is common in non-linear systems like weather and traded markets.

This makes it likely that the bounce we now expect will take that index back up to (or towards) the level of that compression, the low-end of which is at 7780. It may well be that this will be a good chance to re-sell. We will comment further as and when this level is reached.

In the longer term, the violence of last week's movement ended with the anticlimax of weekly-scale compressions in several US indices, as shown in the next charts. This slightly counter-intuitive outcome means that prices could still move either way in the next few weeks and months. The levels of these compressions have been broken downward in the first two sessions of this week, but a weekly compression cannot 'break' until the price closes outside its boundaries at the end of the week, so we must wait.

US Equity weekly comps

There have also been some US sector index bottom extensions that we will supply on request.

European and Asian markets have produced a few bottom extensions. Some examples:

UK, EuroStx, Korea bott ext

This is just more evidence that a general bounce in equity markets is likely. Again, we will see what action should be taken when these signals have matured a bit (they last a median of 17 days) as the bounce may falter and fail. The exception to this  'trading' approach remains the UK, where we have been saying for many months that equities should be bought for the longer-term. Now is a good moment to add to longs.

Commodities have also fallen but there has only been one bottom extension - in Cotton, where all months have generated the same signal. Here is a continuation chart, which looks like all the others:

Cotton bottom ext

This too can be bought now. We have been wrong-footed in commodities by the events of last week and so our bullish view of grains is now stale. We still think it likely that the long running grain bear markets ended in May, as we proclaimed loudly then, but we expected the weakness that set in from Mid-June to have found support a bit higher than the lows that were made last week. We will report more as we see it.

Lastly, Bonds. In our July 25th edition we reported that US 30-Year bond futures had compressed and that we thought this compression was breaking downward. It didn't, and the upward break that came on Wednesday/Thursday last week was strong.

Bonds & Bunds summary

Our apologies for anticipating the direction of a compression break - we should know from experience that this is a 50:50 bet and yet we were fooled. As the second chart above shows, the German Bund has now extended, so the rally is in doubt again, but as we keep reminding our readers, it is unwise to aim to sell any government bonds short for any more than a brief dip while the prospect of easier monetary policy (including QE) remains alive. In Europe that could be many more years as the Southern countries remain hobbled by their membership of the Euro. The ECB seems to be the only 'adult in the room' and so will be expected to take more measures to boost flagging economic activity soon.

All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com