- New Science in old markets -

After the gold rush

The sharp rally in many stock markets yesterday, January 2nd coincides with the turn that we expect to occur either today or yesterday as reported in the 11th December edition. This also comes at the end of a confusing period in which the cross-currents that always occur in markets towards year-end have been exaggerated by the fiasco that was the ‘fiscal cliff’.

The outcome of any turn (in this case a cluster of them) depends entirely on the prior trend into that turn. Downtrends will turn upward and uptrends will turn down.  Trendless markets can start either new uptrends or downtrends.

Despite the 2 days of strength of US markets immediately before this turn, the prior trend in many other equity markets was actually ‘flat’ or ‘slightly down’. This means that in many places the turn could mark a new uptrend and it is easily possible that the fear caused by indecision in Washington made the turn come one trading day early in US markets, meaning it could have marked the low on the 31st December. This explanation may be too subtle and it may well be that the turn simply marked a high point from which prices will now fall. Because both cases are plausible we will have to wait and see.

Other signals are also mixed. We have seen some further top extensions in equity indices as a result of this most recent rise:

Note that there are no extension signals in US indices and the Dow transport index has clearly broken upward, leaving all those weekly-scale compressions behind:

This is the strongest evidence that a new move upward has begun, but we must wait until the close of the week before we can call for more strength – if there is substantial weakness today (Thursday) and/or tomorrow that wipes out all the sudden strength of yesterday then it is likely that we will be back in the ranges that prevailed before. This must happen very soon or we will have to conclude that there is a new uptrend in force.

If you are still short of US equities from the 20th December or Southern European equities from the 27th December, place a very close protective stop. If you took profits on either, wait before taking new positions. We still favour campaigning from the short side of Spain, France, Italy and Greece but we need a fresh reason to enter a new trade.

A similar argument prevails in energy. We have been bearish of these various contracts for a little while and they have not shown any uniformity. Heating oil and Rbob gasoline have gone sideways, while crude has risen – most strongly with the equities rally yesterday. There is a new weekly-scale compression to report in WTI crude, which joins the existing weekly-scale signal in Brent:

As with the Dow transport index, these contracts are currently breaking upward from these compressions but must maintain that break through the end of the week if we are to change our view and call for more strength. The ‘product’ contracts of heating oil and Rbob are simply stuck in ranges, so there is a good chance that these ‘raw material’ crude contracts will also fall back from their present strength – the ‘products’ are compressed at daily and weekly time frames:

So again we wait until the weekend to see what the outcome of these incipient breaks may be.

Grains rallied briefly with equities and crude oil yesterday but soon faded. We have pointed out some daily-scale bottom extensions in wheat and corn lately but we now have to conclude that they merely served to slow declines. Wheat is now nearing longer-term support from the weekly-scale compressions that led to the original up-move:

The other grains are more mixed and all are due for some turns in these two days, the 2nd/3rd January so do not assume that they will continue to fall here. More on this at the weekend.

Lastly, some other prior trends now seem to be reversing - including the Yen’s recent weakness. This had produced extensions along the way as it fell and now seems to be strengthening. This is directly opposite to the weakening direction for the Yen that the new Japanese government would like to see, which serves to remind us of the limited power of any government in this globalised world. Successive Japanese administrations have wanted the same thing but to no avail. If long Yen, stay long. If not, buy some.