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Spain and Italy extend, commodity index compresses and drops

The Dow versions of the Spanish and Italian national equity indices both made top extensions yesterday, as we thought they might:

This is usually a ‘sell short’ signal but we have a couple of doubts. Selling short at new highs after a strong up-move is usually suicidal behaviour and there is some history of these Dow indices making repeat extensions, as can be seen in the last run-up. This adds an element of risk to selling either of these markets right here.  However there is a grade 2 turn due tomorrow and/or the next day 9th/10th January that may tilt the odds back in favour of selling.

It is very unusual for prices to make a ‘spike’ high point from which they then fall into a bear move – it is more common for a bull move to end with one or more top extensions, followed by a period of sideways trading as a ‘top’ is formed. After that, a bear move can start. Accordingly, weighing the evidence, we do recommend that you start selling short hereabouts but save some ammunition in case prices rise a bit more into tomorrow and the next day. After that, be prepared to buy back some shorts on dips and then re-sell on rallies to ‘trade the position’ a bit as the probable top forms. This is the same advice that we gave after top extensions formed in US indices last year and it is always sensible to trade top extensions this way.

Alternatively, it may be sensible to concentrate on selling France instead as it shares the woes of the other two but has not rallied at all.

Elsewhere, the commodity index that we follow has compressed, broken downward, bounced back to the compression and dropped again. This compression is only at a daily scale, but the likely new down-move may be longer-lasting that the usual three weeks or so as there is a pre-existing downtrend that is visible in weekly charts:

We have already advised selling short copper, which has since dropped, and we are looking for others to add. Energy contracts are the most promising candidates and we watch closely for fresh signals. Gold will probably follow too, but we have no signals to report there.

More soon,