- New Science in old markets -

Japan extends, US equities break up as bonds drop. S. Europe in resistance

Japanese markets have extended. The recent policy changes announced from Tokyo have produced large moves up in Japanese equities and down in the Yen. Both these markets were already trending in those directions and this massive attempt to kick-start this ailing economy pushed the trends further. We missed the beginning of this latest ‘leg’ of the move, as we generally do when it is caused by some fresh news event but now it seems to be over, at least for now:

We have thought for a while that there would be some more upward movement in Japanese equities but this seems to be a bit too much a bit too soon. If you still have any long positions remaining, we now advise taking profits or at least protecting them with close sell-stops. Traders may buy the Yen for a bounce (meaning sell the $/Yen as shown in this chart). Malaysian equities also made a top extension last night which is not shown.

US stock markets strengthened yesterday too, as bonds and notes fell, so we can now see that US Bond and stock markets continue to have a negative relationship – we warned that bonds would drop (so yields would rise, see below) but were uncertain about the effects on equities. This up-move has pushed prices high enough to put the various Nasdaq instruments up above their recent compressions. This was the signal to cover US equity shorts and wait:

We don’t think that this rally will travel far as we have seen and reported weekly- and monthly-scale top extensions in many US indices but we will stay side-lined until we have a new reason to sell short again. In the meantime, short-term traders may wish to buy dips in US equities for quick trades – this rally will probably go on for some days, possibly two or three weeks. Traders should also keep selling rallies in bonds. Those longer-term US equity index top extensions will inhibit any lasting strength, so be nimble. There is a large turn coming up on Wednesday May 8th that may coincide with the start of a larger decline in Equities. We will watch and advise - a ‘swerve’ is always possible.

The situation in Europe is different. There, we have advised running a short campaign in the equity markets of Spain, Italy, Greece and France. We advised taking some profits after a bottom extension in Greece showed that a bounce was likely and that has now occurred. Spain and France are now back up to the levels of some old (actually, not so old) compressions that will offer resistance and so we would re-establish short positions starting hereabouts:

Our preferred 'sale' candidates remain Spain, Greece and Italy. We include France because we think it belongs in that group and so has further to fall to 'catch up'. The easier profits are probably to be found in selling the others, while France still trembles on the brink.

The expected strength in the Yen will push the US $ index down a bit. Other currencies were already starting to move up against the $ and this may accelerate that process. We already have a long-outstanding recommendation to be long of the £ against the $ (Cable, as it is called) and this is starting to improve. Hold on. Watch out for some support in the $ index about 1.5% below current levels from an old compression, as shown here:

If and when that level in the $ index is reached (around 80.90), take profits in the £ position and any profits that you may by then have in the $/Yen too.