There have been a number of daily-scale top extensions in European indices in the recent past and a scattering from Nasdaq indices on Tuesday last week – all reported to you. These have marked an end to the recent rally but no real weakness has resulted. It is rare for markets to reverse directly from an uptrend into a downtrend – a change from up to down is usually more of a process than an event, but we took the opportunity to recommend short-sales in selected indices, looking for the first part of this process to provide an early dip.
Now we have seen the first weekly-scale top extensions, again in the Nasdaq and in a single European index -Norway:
This means that we are now looking for more than just a dip at the end of an up-leg and that these markets are now entering the ‘turn around’ from longer-term uptrends into downtrends. We reported several monthly-scale top extensions earlier in the year but the missing ingredient has been any top extension signal at a weekly scale. Now we begin to see them, the prospects for equity markets have just got even darker.
It remains likely that this is just the start of the process and so the outlook is for choppy trading as the next few weeks go by. This fits with the relatively large number of equity turns that we expect in the run-up to year-end, as reported in today’s turn update and it means that trading will be difficult. Bear markets are always harder than bull markets and the transition can be even worse. The best posture is to establish a ‘core’ short position and then to trade in and out of it as dips and rallies permit. We will try to advise when to do this but good dips should be used to cover some shorts anyway, whether or not we get signals that we report to you quickly enough to be useful. Rallies should then be used to re-establish shorts. The eventual market drop that should come at the end of this process may be signalled by some compressions that break downward – naturally we will watch and publish as soon as we see any.