There were top extensions in the equity markets of Spain and Greece again on Friday. These were at a daily scale and have occurred as we enter this current week of expected stock market turns. There are lots of turns due this week but the timing is not precise – they are spread evenly through the week so there is no marked cluster on any particular day. The new extensions:
We expect that US equity markets will complete their ‘rolling over’ some time during this week of turns, so ending the formation of the ‘top’ that we suspect has been developing there - declines may then begin quickly afterward:
These are only daily-scale top extensions but there have also been monthly-scale versions, as reported, so there is the chance of a drop rather than just a dip from hereabouts.
European markets have been sharply divergent in the last few weeks as Spain, Italy, Portugal and Greece have all rallied well whereas Germany has ‘churned’ in a similar fashion to US markets and may also be making a top. The stock markets of the Southern countries that have rallied so well are the ones that are making top extensions so we also expect these to stall this week. France is somewhere in the middle – feeble compared to its Southern neighbours but a bit stronger than Germany and it may (finally) be the best candidate to choose for selling short:
We advise starting to adopt further short positions on rallies in Europe and the US starting in the next day or so. It may still be uncomfortable for early bears for a few days but the turn down could happen at any moment.
Bonds too are due for turns this week and the timing is a bit more precise – it is during the earlier half of the week, starting today. This comes at a time when US 10-year note and 30-year bond yields have just made daily-scale compressions:
Meanwhile Euro (i.e. German government) bunds have compressed at a weekly scale:
We can never tell whether the break from compressions will be up or down but the coincidence of turns and compressions has the effect of ‘turbo-charging’ the compression, so watch out here. The best way to take positions for the move after a compression is to wait for the break and then follow it. This is often psychologically hard to do but is the only way to improve the odds from 50:50 to 80+%. Watch carefully and if you see a clear break (preferably on or near the day’s market close) act immediately. After some days there may be a ‘return movement’ to the compressed area that will give a second chance but these are not guaranteed to occur, especially when turns coincide with compressions – the move may be explosive, as it has been from the recent copper compressions – see the 6th August edition. Here is an update: