- New Science in old markets -

Equities dip two days before turn date

Equity markets in the US made a slight new rally high yesterday before dropping sharply in the same trading session. This comes two days before the largest turn that we expect during these few weeks, a grade 2 that we expect tomorrow, February 22nd as reported in the 8th February edition This turn is mostly a US affair, so we are keenly interested in the behaviour of the US markets into the turn to determine whether it marks a high or low.

The important question now is: did the turn come 2 days early or is this a ‘swerve’ from which we should now expect a low point tomorrow? We can't say for sure yet, but there is some additional information. There was a solitary daily-scale top extension in a mid-cap US index on Tuesday:

This index produces reliable signals, as labelled here but these signals can also mark occasional interim pauses in a trend, as also shown. This is normal for top extensions (they mean 'not up') which is why we prefer to see more than one signal at each event or an extension that comes near a turn, as here. This turn+extension combination points downward more reliably than either one alone.

We also have some unresolved weekly-scale top extensions, as already reported. An update:

This fairly scattered group does not contain any one major world index but the fact that we have this many weekly-scale tops (Mexico too, not shown) gives warning that the recent widespread stock rally is/was just another 'leg up' and did not mean that a major new bull market had started. Generalised equity market strength is probably temporary. We even have some recent monthly-scale top extensions:

Again, none of these is in a globally important index, but the fact that we have seen this many occur at once gives warning not to be too bullish. This evidence stacks up to support our long-held view that equity markets in general are stuck in long-term ranges and that we are at or near the top of those ranges. There are exceptions, as we write below.

This accumulation of bearish indicators leads us to think that the turn that we expected tomorrow did indeed come early and that it marked Wednesday's high point in the US markets. There is still a chance that this was a 'swerve' and that we will see a low point tomorrow, but we think this chance is a small one.  The strongest piece of evidence that we have for this bear view is the first one in this edition - the S&P400 top extension and the fact that it occurred so close to a turn date. This cloudy situation should soon resolve as the next few days come and go. At the moment, this means that we will look for a place to sell short and any outstanding longs should be protected with a close stop until we get a clearer view.

There are exceptions to this generalised 'Equities are in a range' view - Japan, Germany and China seem to have better prospects and this dip will lead to a second chance to buy China. We already recommended buying the other two before the strength from November, but missed the start of the China rally. We will watch for an opportunity - a daily-scale bottom extension for example, in one of the Chinese indices and advise when we see one.

The worst prospects are still for the Mediterranean Eurozone members. For reasons often stated, we consider that Italian, Spanish, French and Greek equities should all be sold short on any rally, especially the first two. If you have complete freedom of choice in your investment/trading decisions then we would prefer the short side now, as expressed in sales of Ibex or MIB (followed by the CAC in order of preference) and to buy the dip that seems to be coming in the other three already mentioned to establish longs. The US is somewhere in the middle and can be traded from both sides but the (eventually) looming catastrophe that will result from the unwinding of QE will fall disproportionally on the two main exponents of it - the UK and the US. This means that all long positions in these two markets should be regarded as being for trading purposes only. No buy and hold please. An edition on the longer-term effects of QE (as seen through our feedback spectacles) is in preparation and will be published soon.