- New Science in old markets -

That equity turn, china, Japan, Heating oil and the Cable rate. Buy the bond dip

The equity turn that we were expecting on the 22nd February has come and gone and there is no other due until the 21st March. As explained in the February 27th edition this turn was mainly expected in US indices and several made both a new high and a new low for the prior few weeks on the next business day. Because of this wide price range on a single day we could not tell immediately whether this potentially important turn marked a high or a low but now that some time has passed it looks like it was indeed a low:

This is still not the clearest signal we have ever seen but it is often the case that the significance of a turn is only apparent after some time has passed but while there is still time to take action.

There have also been a number of compression signals in equity indices in the US but also more recently in Europe. These all seem to be resolving into new up-moves, which fits the idea that markets have passed a low point and are now heading higher. There is still the small problem that prices of most equity indices are stuck in ranges but compressions occur just before such ranges break and it looks as though we are still getting reasonably early warning of this break – upwards. A selection of signals:

None of this should be taken to mean that we have changed our minds about the situation in Europe. The conditions of Italy, Spain, Greece and France remain dire and we remain bearish. We want to sell rallies in these markets, not just sell blindly, and it looks as though this incipient rally will present another opportunity to do so. In the meantime, our candidates for purchase remain: Germany (our perennial #1), the US and probably the UK although there is no current signal there.

China has dipped a bit during this period of sideways price movement in many markets and it seems likely that the upward trend that started in early December will now resume. There may be a better dip but the odds of it occurring have now shortened. There are no fresh signals in China or Japan:

As you can see from the second chart above, Japan keeps going up and we have still not found a place to take profits on long positions.

In the 'other China' of Hong Kong there was a series of weekly-scale top extensions as the rally first ‘crested’ which will make it difficult for any strong further gains there for several months but that needn’t inhibit the main China markets too much:

Longer-term the situation remains obscure in western equity markets (and Japan) as the potent forces unleashed by the relentless printing of money by central banks will obviously end badly. We are only just starting to see the shape that it might take – see the Feb 22nd edition on QE. We are also seeing some monthly-scale top extensions from minor equity markets that will build into longer-term storm warnings. We are dancing a little closer to the edge.

There have been some new signals to report, staring with a daily scale bottom extension in heating oil. We have been bearish of commodities as a group for some while but have moderated this in recent days because of a bottom extension in the continuous commodity index, reported in the second edition from the 22nd February. Now we expect a rally in energy markets too and so would cover all outstanding shorts in Rbob, crude and heating oils and try a long position. Rbob is probably the best bet here, but all will move more or less together, as usual, excepting Nat Gas.

The second chart above shows a repeat top extension in the $ index. This is rising from weekly-scale compressions, as also shown in that second February 22nd edition and so daily-scale top extensions are a bit dangerous to trade as they are against the main trend. In this case however, there is a safer way of selling the dollar to take advantage of this temporary overstretched condition - by buying the £/$, known as ‘cable’. We already suggested this trade on the 22nd February but now there has been a weekly-scale bottom extension in this pair, making it an even stronger recommendation:

The renewed strength in stocks has produced a small set-back in US bond markets. We recently advised buying these on any decent dip and this seems to be exactly such an opportunity.