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Spain extends, so does the US$

There were some daily-scale extensions in different markets on Friday to report. Spain made a top extension, which argues that this market should be short-sold again to replace the shorts that we advised covering in late July. This comes a little earlier than we expected and implies that the market boost from last week’s announcement of ECB bond-buying was very short lived. We have already advised selling Italian bonds/buying German Bunds as a spread because of a top extension in BTPs (the acronym for Italian 10-year Bonds) and this fresh signal from the Mediterranean means that you should also now consider short-selling BTPs ‘outright’ too. Charts:

The burst of liquidity from ECB bond-buying will (if it happens) produce different results in different markets and we do not draw any wider conclusions about stocks from this single top extension in Spain. Stay long Germany – this is our longer-term view in any case but we have also recommended adding more longs on the break of a compression last week. We treat these two as separate positions, not as a long Germany/short Spain spread and will advise on their separate management.

There was also a bottom extension in the dollar index. This comes near the level of an old weekly-scale compression that we already identified as likely to provide support and so we now advise covering US$ shorts and taking long positions. The $ index is a trading vehicle and so we suggest using it to take a position here – if we find a better pair to trade we will advise. Charts:

It is rare for such a perfect combination of signals to occur and we would advise caution now in any market that will be affected by some imminent $ strength. We have already warned that precious metals may dip, but watch out for other $-influenced markets (such as energy) too. We will advise immediately if any relevant signals arise.