Stocks turned back down from the resistance area identified in the Oct 18th edition and are now in support, mainly in Europe. This large amount of churning conceals some considerable divergence as the different magnitude of the moves in different markets has led to some trends. The Nasdaq has fallen particularly hard for example - 4% since the rally high of last week - and has formed a clear downtrend in the past month, yet other American indices are still stuck in the range that started six weeks ago. We have been paying particular attention to the Dow transport index, which has been compressing at a weekly scale and which also made a daily signal last week. It broke upward and has now come back down to the area of that compression, where we expect support, as usual. This area was (just) punctured at the lows of yesterday but the market recovered to close within it, so the support holds for now. If you are holding shorts in the Nasdaq from last week, tighten protective stops. We would normally recommend taking profits after such a quick drop in ranging conditions, but this range must break soon and it would be pleasant to have a ‘head start’ by being short from such a good level if that range break turns out to be downward. Charts:
European indices have returned back down to the compression levels that led to the quick rally early last week. This is the main support that we can identify and represents another chance to buy in Germany – our perennial favourite candidate to buy in Europe whenever there is reason to buy any stocks in Europe. The market should hold at the levels of that compression, so protective sell stops may be placed just below it – the equivalent low that day in the DAX futures contract is 7183. The UK is also a candidate for purchase here but we will quickly change tack if these compressions don’t hold. Charts:
Industrial commodities such as energy markets and copper have continued to fall, as warned last week. We have no fresh signals but will watch carefully for places to cover shorts. This fall could be large as there is no obvious reason for these prices to reverse soon - the preconditions for bottom extensions don’t yet exist. Charts:
Once again, we remind you that we expect increased volatility in many of the markets that we follow, mostly because of the highly compressed state that several are exhibiting - not only weekly-scale compressions in the Dow transport index but also monthly scale compressions in some commodities. There have also been monthly-scale top extensions in some US sector indices, which is why we have a slight preference for an (eventual) break down in US equities. We wait for that weekly Dow transport index to break to show us the way.