- New Science in old markets -

Update as we approach the big stock turn

There is a big turn due in equity markets on Thursday this week, the 17th October. Some other markets are also due for turns on or around the same time, as reported in the September 9th edition, so expect a busy end to the week.  Turns mark highs or lows and we cannot tell which they will be until very near the actual date when the existing trend provides that important answer - uptrends lead to highs, downtrends lead to lows.

This equity turn will probably mark a high point as markets are currently rallying. There is always the possibility of a ‘swerve’ in which a market that seems heading for a high point suddenly dips a couple of days before a turn, which then marks an interim low point instead. We often mention this possibility even though swerves are rare as they are important and can occur part-way through strong trends.

Equities have provided some evidence that the current rally may be a ‘last gasp’ before some kind of more serious decline sets in and so we are looking to this turn to provide more clarity. It is a big one, so if prices remain strong in Europe and the US until Thursday an important high seems likely to happen on or around that day. We advised covering shorts on the last turn (which came a day late in the Dow and two days late in the Nasdaq) and have been expecting to recommend re-shorting on this next turn IF it coincides with new highs for the rally AND if there are top extensions - these have now begun to appear, in Europe anyway:

Spain, Italy (and Greece, not shown) have all made daily-scale top extension signals in the last few days, which indicates that their current strength is temporary. This does not necessarily mean that declines will start immediately as extensions signal the end of old trends, not the beginning of new ones. There is a reason to be immediately bearish however – a UK index that we follow broke down from some daily-scale compressions at the end of September and has now bounced back up to that level, where we expect to find resistance. Many trends start with compressions so this bounce offers a good chance to sell this market (and others, by implication) short. This index should not push through the level of those compressions, so we are watching very carefully over the next few days for signs of failure. Any fresh top extension signals or new compressions will also count, so we will report more as these days pass. France remains a favourite candidate for sales:

There have been fresh compressions in bonds, copper, the commodity index, the $/Yen pair and even a new weekly version in Rbob (see bottom), so pressure for a new move is building up in many different asset classes:

The Brent oil contract compressed at a daily scale, broke up and then dipped back to the compression. This seems to be a ‘good break’ and so you should now be long of that contract, despite the new weekly-scale compression in Rbob. There is some divergence between US and European oil prices at the moment, no doubt reflecting the massive new energy supplies from shale in America. This bonanza has not yet happened elsewhere and so further divergence may yet occur – US crude prices may well get progressively cheaper than Brent. Nonetheless, this ‘buy’ recommendation in Brent will probably also apply to Rbob in due course, but we have to wait for some resolution of this new weekly compression before we can advise jumping in.

As usual, fresh compressions are an opportunity to tighten stops a bit on existing positions - a clear, closing break out of say, the $/Yen compression would signal an exit from the long Yen/short $ trade recommended in the October 2nd edition.

More very soon.