There were more daily-scale top extensions last week in European stock indices, mostly on Friday:
This was the last day of the turns that we expected last week and these extensions only confirm what we already thought – stocks will have difficulty going up from here. We have already advised selling short our usual candidates of Spain, Italy, Greece and France as of mid-week. Our favourite is Spain, which is well down from those levels but the others are weak too. As we wrote in that last edition, this may well just be the start of a ‘top’ being formed in the stronger European markets but that the prospects for this Southern group are bad immediately. We did not get an extension signal from any important US index so we have not yet advised selling short there. Prices of US equities will probably fall eventually (and are starting the process now) but we like to see both a turn and an extension before we make a recommendation to enter a new trade. We watch carefully for this combination, or that of a turn with a compression break, and will report.
Meanwhile, grains and cotton have compressed:
We are broadly bearish about commodity prices in the longer-term. More recently we called for a counter-trend rally to occur in energy, metals and grains. All rallied but the grains were quite feeble. Now they have compressed it would be easy to conclude that prices will break down from these compressions to resume the downtrend, Maybe so but we never know which way compressions will break as they mean that the compressed market is balanced on a knife-edge. Another bear market rally is always possible if these compressions break upward but if they start to break down, then by all means re-short these markets.
This advice only applies to grains and cotton - copper still has rally potential. Energy markets may have 'done enough' by rallying from their mid-April lows and we are now sidelined.