The Dow and various instruments linked to it made top extensions yesterday, meaning that the current rally will stall from hereabouts. There have been a small but growing number of top extensions from around the world that we have reported in recent editions and this is the most important one yet. It also comes at the moment when we expect a turn in equity markets – the turn schedule was updated in the September 9th edition. The current turn is hard to read and may represent two different events during this week but we always pay close attention when turns coincide with extensions and usually recommend a trade at such moments. So it is here. Sell the long positions in US equity markets that we have recommended for some time and reverse into short positions.
There is support not far below the markets from the recent compressions mentioned in the September 10th edition but it may not hold for long. If it does then this will only be a quick trade - we will see how events unfold. We remain pessimistic about the prospects for US and some (Southern) European equity markets in the longer-term, so this could also turn out to be an important moment when short-term and longer-term influences coincide. Shorts established hereabouts may prove to be very profitable if we can hold on.
We have been waiting for a chance to short-sell those Southern European equity markets and it is time to try this too. Our preferred candidates remain Spain, Italy and France. Greece and Portugal should both also be on this list but are hard to trade. France remains the ‘wild card’ that probably has the most potential to fall as it is precariously poised above an economic precipice as everyone seems to know. It hasn’t collapsed yet but being tied to a much more competitive Germany in a single currency means its lack of competitive edge will catch up with eventually – that could be at any moment and it will be a general market drop that reveals the awful truth. It could be now.
Here are charts showing where support is close to the markets: